An Analytical Study of the Demand for Money in Saudi Arabia

Empirical studies on the demand for money have been the object of great attention by economists due to its central role in conducting monetary policy by making it possible for monetary authorities to effect desired and predictable changes in targeted macroeconomic variables such as income, interest rate and prices by appropriate changes in monetary aggregates. The present study sought to investigate the cointegrating property of money demand in Saudi Arabia by using annual data for the period 1987-2009 and applying the vector error correction model (VECM) technique. Findings indicate clearly the existence of a long run cointegration relationship between the demand for money (M2) and its explanatory variables, namely real GDP, the interest rate, the real exchange rate and the inflation rate. The error correction coefficient was found to be statistically significant and carries a minus sign as expected. The deviation of money demand from its long run value would be corrected in about a year and nine monthes.