How Stable Is the Broad Money Demand Function in Australia? – An Empirical Study

: This paper deploys the Johansen cointegration approach to investigate the presence of a long-run broad money demand relationship in Australia, using annual data for the period 1970-2008. The empirical results suggest the presence of a long-run relationship between real broad money balances, real output, the yield on Australian Government long-term bonds, yield on the US Government Treasury bills and the nominal effective exchange rate of the Australian dollar. Although the coefficients on these variables bear their expected signs, only the coefficients on real output and the yield on Australian Government long-term bonds are found statistically significant over multiple subsample periods. The stability test results suggest that the broad money demand relationship was unstable during the early 1990s but has gained stability since then. The paper also draws implications of the findings on the design and conduct of monetary policy.