Demand for Money in Sri Lanka During the Post Liberalisation Period

This paper investigates the long run demand for money and the short run dynamics of the long run money demand. The estimation of a money demand function for M1, using quarterly data for 1978 Q1 to 2003 Q4 forms the basis of this investigation. The findings of the study reveal that M1 is co-integrated with real income and the nominal interest rate. The study, further found that the one year term-deposit rate of commercial banks was the best fit for the model used when compared to alternative interest rates such as the 3-month Treasury bill rate, the 12- month Treasury bill rate and the repo rate, implying that the 1-year term deposit rate is the opportunity cost of holding money. We also found that M2 is not co-integrated with real income or any of the above interest rates, in nominal terms. This indicates that monetary authorities should pay close attention to the narrow definition of money when formulating monetary policy. (JEL E41, E47)  

DOI: 10.4038/ss.v34i1.1237

Staff Studies Volume 34 Numbers 1& 2 2004 p.1-12