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Variance decomposition analysis of the demand for foreign money in Egypt

Tarik H. Alami (Economics Department, The American University of Beirut, Beirut, Lebanon)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 1 April 2001

1484

Abstract

The demand for money is an important function of stabilization policies where such policies depend on the ability to manipulate the size of money supply in order to insulate real output from monetary disturbances. This paper investigates whether foreign money in Egypt should be included in transactions oriented measures of money supply. Variance decompositions analysis of demand functions for domestic money reveals that deviation of the expected rate of return on foreign money from that on domestic money is more influential than expected depreciation in accounting for quarterly forecast error variance in domestic real balances. This result suggests that portfolio rather than transactions considerations is the dominant factor behind holding foreign money in Egypt. The main policy implication contained in these results implies that foreign money should not be included in transactions oriented measures of money supply that are used as targets when implementing a monetary policy.

Keywords

Citation

Alami, T.H. (2001), "Variance decomposition analysis of the demand for foreign money in Egypt", Journal of Economic Studies, Vol. 28 No. 2, pp. 122-135. https://doi.org/10.1108/EUM0000000005427

Publisher

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MCB UP Ltd

Copyright © 2001, MCB UP Limited

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