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The money demand

This research is intended to discover and analyze any of the techniques which could be used to anticipate the money demand and its implication, particularly in the economy of Saudi Arabia, irrespective of the linearity or non-linearity of the relevant techniques or methods use. So that a better understanding of the topic is developed in the readers mind, the paper first briefly introduces the topic to in which a concise overview of the recent behavior of Saudi Arab’s economy and monetary and fiscal policy is discussed.

Moreover to know the core objective of this research the purpose of the study is mentioned so that the reader’s point of view remains focused on the topic. A hypothesis question is developed as an addition to the purpose of the study so that in only one sentence readers are able to refer to the key objective of this research.

Furthermore, in the first chapter, the economy of Saudi Arabia and recent developments are discussed in details after which the financial system is discussed as it is necessary to get basic know how of the financial system of the country first someone is to find out the money demand behavior of a certain country, and it may also be essential the practices of the relevant commerce institutions that how they are engaged in conducting of the monetary policy, thus for this essential requirement the conduct of the monetary policy in Saudi Arabia is discussed after the discussion on the financial system of Saudi Arabia.

After this, in the second chapter, the Divisia monetary aggregate technique is discussed in massive detail, while the third chapter deals with the literature review and any journalism found in regard to the topic of this paper. And in the fourth chapter, any hypothesized assumption, suggestion and recommendations are discussed followed by the methodology exploited in the research of this topic.

It is also ensured that the methods used in data collection and the research of this paper are not merged with the methods which are actually used to create links between the linear and non-linear techniques which are used to predict the money demand in Saudi Arabia. And in the last, in chapter five, the analysis of experimental data is discussed so that detailed statistical information could presented to support the theory discussed in other parts of the research.

In the end, a summary and conclusion are also provided as after having read this detailed dissertation, a skim on the summary and conclusion can be helpful to reach any conclusion by the reader. Introduction The Saudi Arabia’s economy is predominantly oil-based contrasting most other rising economies of the world. Almost all government spending is primarily financed by oil revenue. It has played a vital role in creating economic growth in the country since 1973.

Such growth has resulted in increased demand for financial services and the rapid extension of the financial system. Saudi Arabia is experiencing drastic institutional adjustment because of severe government budget deficits in the last several years since 1985. In 1999, the government established the Higher Economic Council to increase the private sector’s share in economic activities. Saudi Arabia had also been negotiating for accession to the World Trade Organization (WTO) since many years which was finally achieved in 2005.

Accession to the WTO opened the Saudi financial sector to more competition, thus, requiring the Saudi government to make significant structural changes in economic sectors, including the finanial sector, in order to establish a sound and competitive economy. The use of macroeconomic policies, fiscal policy and monetary policy for economic development and stabilization is essential; the monetary authority has increased the frequency of its implementation of monetary policy in recent years. The demand for money is a very important component in the formulation and implementation of monetary policy.

Policy makers need to have a clear understanding of which monetary aggregate should be subject to monetary control and what are the factors that force this aggregate to change. This understanding enhances the ability of central banks to achieve the main objective of any policy, with predictale effetc on inflation and economic growth. Therefore, the identification of a stable money demand is a very important issue that concerns both formulation and implementation of a soud and reliable monetary policy.

The importance of a predicable amd consisitent money demand function is discussed by Friedman (1959), Friedman Schwartz (1982), Laidler (1993) and Nell (1999). Ducaand VanHoos (2004)in a paper that surveys the addition to the money demand literature since 1980s, readdress the importance of understanding the demand for money. In this regard, the purpose of this thesis is to provide an analysis of estimating the money demand using Linear and non-linear techniques with particular context to the economy of Saudi Arabia.

Due to its importance , the demand for money and its properties has beacome a frequently visited subject in both theoretical and empirical. Many empirical studies aimed at finding a stable money demand by focusing on choosing the appropriate measure of money, scale variable, and the correct opportunity cost to include in the specification of the money demand function. These studies have repeatedly gained momentum with the introduction of new econometric techniques. Sample of studies that include a variety of econometric models and specifications of money demand function are Friedman (1959),Chow (1966), Goldfield (!

973), Laidler (1993), Bahmani-Oskooee and Malixi (1991),Bahmani-Oskooee and Pourheydarian (1990), Hendry and Erickson (1991), Hafer and Jenson (1991), Johanson (1992), Hamori and Hamori (1999), Bahmani-Oskooee (1996), Arize and Shwiff (1998), Ewing and Payne (1999), and Majid (2004). These studies have focussed on understanding the properties and the stability of money demand as a necessary condition to to establish a reliable and predictable relationship between the relevant monetary aggregate and nominal income and inflation.

Recent efforts have been devoted to developing economies and their money demand functions. Purpose of Study The main objective of this thesis is to know any linear and non-linear techniques which could be used to understand the status of the money demand in two aspects, i. e. first in general terms and then precisley in the context of the Saudi Arabian economy. For this purpose, the Saudi Arabian economy and its financial structure along with the monetary and fiscal policy are discussed. Moreover, relevant techniques used, are also discussed.

Hypothesis The research question for this study is as following: “What are the possible and practicle linear and non-linear techniques and methods which could be used to estimate the money demand in Saudi Arabia? ” A brief inroduction to every relevant technique used is to be given along with comments on its accuracy, results, any significant assumption, its relevance to the Saudi Arab’s context, other example than the Saudi Arabian context (if available) and any exceptions are also to be discussed. Significance of Study

As discussed already that the key objective of this study is to discover the linear and non-linear techniques, the outcomes of which could be analyzed to predict the money demand in the Saudi Arab’s economy. The results of this study provide precise and relevant notions about the money velocity and circulation in the country and its effects on the economic aspects. These results can be possibly of vital importance and interest to the economists and government official responsible for the country’s economic behavior.

Summary of Findings Saudia Arabia is one of the richest Muslim countries which enjoys its oil benefits due to its massive oil reserves. The first chapter of this thesis describes the relentless efforts of the House of Saud which had been siginificant in transforming the schorching deserts of the Saudi Arabian lands into one of the strongest economis of the and moreover the monetary policies employed and the economic overview and the finincail structures is dicussed breifly in this chapter.

The momentum of the growth of the Saudi Arabian economy has boosted due to the structural reforms in the financial sector and the economic policies at the international level and also due to the drastic changes in the oil prices. So that long term and robust economic development could be reached in all of the social and economical areas and aspects of the Saudi society the government has introduced some transformations to the traditional system.

By the mid of 2008, generally of the sectors of the Saudi Arabian economy had shown some improvements, primarily these improvements were a result of supportive schemes introduced by the government along with the rise in the oil prices. In 2007, 7. 1% increase was recorded which are 1. 4 trillion Riyals in current prices and in real terms it is 813 billion Riyals. Moreover, to this growth was also registered in the oil and non-oil based industries. The private non-oil sector GDP was 8% whereas the public non-oil sector GDP growth was 4. 2%, which is gives out financial credit of 228.

9 billion Riyals. The oil-sector recorded an escalation of 8. 0 percent with 778. 4 billion Riyals comprising 54. 4 percent of the whole GDP at current prices. In order to fulfill the requirements of the thesis, and to estimate the money demand in the Saudi Arabian economy two different approaches were adopted. Of the two approaches, the first one is the traditional approach, which forms its principles on the basis of the experimental data and results which were based on the assumption that the GDP of the non-oil based activities will be assumed as the predictor of income.

While on the other hand, the second approach was the consumer demand, which is used to estimate the money demand in the society. Under this second consumer demand approach, aggregation of various general demands along with the principles and theories of the microeconomics are implemented, and in addition to this, it included the purchasing behavior of the consumers in terms of monetary assets and durable goods, which are in general related to common household utility and referred to as the consumer goods.

Alternatively, there were other techniques used, which involved the summation of the various aggregate demands, namely these were Divisia (M1, M2) and Simple-Sum (M1, M2) and the corresponding results were also compared. Apart from the above other linear methods were the Co-integration and Error-Correction and the non-linear ones included the Back Propagation Neural Network, these were applied to the Saudi Arab’s context in order to analyze the short and long term aspects from both of the approaches already discussed.

The outcomes of the Error-Correction and Co-integration methods suggest that the assessment of the substitute fiscal aggregates and their determinants revealed that they are incorporated of order one or I (1), thus the method applied to various monetary totals and it determinants is the co-integration method. On the basis of the two earlier discussed approaches, a long term relationship could be observed between monetary aggregates and their determinants, as shown by the outcomes of the co-integration method.

However, when the consumer demand approach was considered improved statistical and theoretical results were achieved. In addition to the above the results of the consumer demand approach suggest that the outcomes from the Divisia monetary aggregates outweighed the results of the Simple-Sum M1 and M2 results. In simpler words the anticipated money demand function, through the Divisia M1 or Divisia M2 as determine for monetary summations, provides us with results which are in agreement with notion which the theory advocate and are statistically robust.

The outcomes of the consumer demand approach indicate an important part for the variable of the opportunity cost that coincides with the theory when Divisia double price is implemented on the opportunity cost variable in the money demand equation. However, these results are against to what is suggested by the literature and journalism in Saudi Arabia, which provide that the significance of the money demand equation and opportunity cost is minimal. In addition to the above, the unitary income elasticity or the unitary hyperbole wasn’t accepted by the any of the models under the traditional approach.

However, the triangular hyperbole was actually accepted by the Simple-sum and Divisia M1 and M2 when the considered approach was the consumer demand approach. Examinations of barring of all determinants in all of the form were organized. In common, merely single erratic, the real exchange rate, demonstrated unimportance in all models when implementing the conservative approach. These conclusions overlay the means for the exploitation of the error-correction order to study the short-run or the vibrant of the money demand function.

The error-correction consequences demonstrate that we were not able to acquire any noteworthy consequences when using the conformist approach. However, we were able to achieve strong results that match with what the conjecture proposes when implementing the consumer demand approach, particularly when Divisia aggregates are used as a gauge for money. Concerning the investigative tests, the residuals in all our anticipated models, using Divisia aggregates and adopting the consumer demand approach, illustrated no momentous proof of hetorskedasticity, autocorrelation, or non-normality.

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