Money Demand in a Dollarized Economy: Evidence from Laos PDR

This paper uses a time series perspective to examine the determinants and stability of the money demand function in the case of Laos PDR. An autoregressive distributed lag bounds testing approach to cointegration in the presence of structural breaks and Granger causality in a vector error correction method framework are applied to data covering the period 1992:Q1 to 2013:Q4. The results indicate that the money demand function is stable when exchange rate fluctuations are incorporated, and the causality analysis reveals that there is a feedback effect between money demand and the exchange rate in the long run. This implies that the exchange rate plays an important role in influencing money demand in the case of a dollarized economy such as that of Laos.