Money Demand Function: A heterogeneous Panel Application

We construct an aggregate data panel for the GCC's six countries and verify the cointegration hypothesis among the variables of the money demand function using Pedroni's heterogeneous panel cointegration tests (2001). Then, we estimate the idiosyncratic, panel and group-mean cointegrating vectors using FMOLS and a modified version of FMOLS developed by Pedroni (2000). We find strong evidence of cointegration amongst our variables. The estimated elasticities have the expected signs in general but are significant only in the case of the scale variable. Unlike previous studies, we find a significant negative the semi elasticity of money demand with respect to interest rate when we allow for heterogeneity amongst our panel's members.