Marcelin Diagne, Ph.D, Economics, Morgan State University, 1700 E. COLD SPRING LANE, Baltimore, MD 21251
ABSTRACT
In this paper, I examine the stability of the long-run relationship between real money demand, income and interest rates in Senegal. Using advances in unit root and co-integration, I test for co-integration between M1 velocity, output and the interest rate. By way of uncovered interest parity, and by virtue of the fixed exchange rate regime, I used both the three months French Treasury bill, and the deposit rate to proxy the opportunity cost of holding money. It is well known that if the series are co-integrated, OLS estimates of the coefficients are super consistent[1], but the standard errors cannot be used for inference. I also used Stock and Watson (1993) DOLS in addition to an ECM. Quarterly data ranging from 1970:Q4 to 2006:Q4 is used in the analysis, and the results reveal evidence of co-integration between real money demand, income and the interest rate. The income elasticities of 1.05 when the deposit rate is used and 0.99 with the Treasury bill are well in line with their expected magnitude of 1. The coefficients for both interest rates were negative as expected, and ranged from -0.05 to -0.03. For this study, I used both an ECM co-integration test, and Johansen (1988) co-integration method.
[1] The coefficients were estimated with Eviews. JEL CLASSIFICATION: E4, E5, F3