Empirical Analysis of Money Demand: Inflation Targeting Effects and Heterogeneous Behavior in Pacific Alliance Countries (PAC)

Abstract

This study aims to estimate a microfounded money demand for Pacific Alliance Countries (PAC) and evaluate whether the elasticities of income, interest rates, inflation expectations, exchange rate, and U.S. rates have changed after the adoption of inflation targeting (IT). As a consequence, we study the role the interest rate has played in these emerging economies under the complementary hypothesis of McKinnon (1973). Furthermore, we analyze the heteregeneous behavior of the demand for money during the IT period using a quantile regression approach. This study suggests that there is statistical evidence that the elasticities of the demand for money have changed after the adoption of IT. Also, the findings indicate that the demand for money has exhibited heterogeneous behavior for all the PAC during the IT period. Generally, interest rate elasticity tends to be smaller in magnitude when real balances are high, while income elasticity demonstrates heterogeneous behavior across countries.

JEL: C2, E12, E41, E52