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Volume :21 Issue : 80 1996      Add To Cart                                                                    Download

THE DETERMINANTS OF THE DEMAND FOR MONEY IN KUWAIT

Auther : By: Hussain Al-Omar

The demand for money and its determinants have received an extensive debate in economic literature. The importance of this subject stems from the impact of the demand for money on the effectiveness of monetary policy and the way monetary policy should be conducted. In this context, the stability and predictability of the public demand for money is at the centre of debate. The argument here is that if the demand for money is stable and predictable, then the monetary authority should set the actual money supply equal to the level of money demand, however, if the demand for money is unstable and unpredictable then the monetary authority should shift its policy to stabilise the domestic interest rate. In addition, the sensitivity of the demand for money to the changes in the interest rate is another issue of debate. The monetarists argue that demand for money is less sensitive to changes in interest rate relative to the interest rate sensitivity of the demand for real assets, while Keynes argues the opposite. This issue of sensitivity has its implication for the relative effectiveness of Fiscal and Monetary policies. The argument is that the more sensitive is the demand for money to changes in the interest the more effective is the Fiscal policy.

This article attempts to study the money demand in a small-open economy taking Kuwait as an example in order to analyse the factors affecting the public’s holding of cash balances in this economy and their relative influence. Accordingly, the article will be divided into four parts, part one discusses the main determinants of the demand for money, part two discusses the functional form of the demand for money, part three is an empirical analysis and finally part four provides a conclusion.

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