TITLE:
Symmetric and Asymmetric Effects of Monetary Policy Uncertainty on the Demand for Money in the United States
AUTHORS:
Arjina Akter, Sheikh Monjurul Islam, Jahan Ara Hossain
KEYWORDS:
Monetary Policy Uncertainty (MPU), Economic Policy Uncertainty (EPU), Money Demand, Real Effective Exchange Rate (REER), United States
JOURNAL NAME:
iBusiness,
Vol.16 No.4,
December
23,
2024
ABSTRACT: This paper examines the stability of the demand for money in the United States by incorporating economic policy uncertainty (EPU) and monetary policy uncertainty (MPU) into the traditional money demand function. Using monthly data from 1987 to 2020, the study extends the literature by investigating both the symmetric and asymmetric effects of policy uncertainty on the real money aggregate (M2) for the first time. The analysis employs the Auto-Regressive Distributed Lag (ARDL) and Nonlinear Auto-Regressive Distributed Lag (NARDL) models, along with CUSUM and CUSUMSQ stability tests, to capture both short-run and long-run dynamics. Our findings reveal that while monetary policy uncertainty leads to an increase in money holdings in the short run, economic policy uncertainty reduces the demand for money as individuals shift to safer assets. In the long run, the effects of inflation and real effective exchange rates persist, while policy uncertainty shows no sustained impact. These results have significant implications for monetary policy formulation.