Project Abstract

Abstract
This research project aims to re-examine the demand for money in Fiji by analyzing the various factors that influence individuals' and businesses' decisions to hold money balances. The study utilizes both theoretical models and empirical data to investigate the determinants of money demand in the Fijian economy. The theoretical framework of the research is based on the classical quantity theory of money, which posits that the demand for money is a function of income, prices, and interest rates. However, the study also considers the relevance of modern theories of money demand, such as the transactions demand for money, speculative demand for money, and precautionary demand for money. Empirical analysis is conducted using time-series data on key macroeconomic variables in Fiji over a significant period. The research employs econometric techniques, such as cointegration analysis and error correction models, to estimate the long-run and short-run relationships between money demand and its determinants. The study also explores the impact of structural breaks and other potential sources of nonstationarity in the data. The findings of the research contribute to the existing literature on money demand by providing updated estimates of the income elasticity of money demand, the interest elasticity of money demand, and the impact of other factors on the demand for money in Fiji. The results have implications for monetary policy in Fiji, as understanding the determinants of money demand is crucial for the effective implementation of monetary policy tools. Overall, this research project enhances our understanding of the demand for money in Fiji and sheds light on the factors that drive individuals' and businesses' decisions regarding holding money balances. By combining theoretical insights with empirical analysis, the study offers valuable insights for policymakers, researchers, and practitioners interested in monetary economics and the functioning of the Fijian economy.

Project Overview

The demand for money is at the heart of how policy should be conducted effectively. Money demand serves as a conduit in the transmission mechanism for monetary policy so the stability of the money demand function is critical if monetary policy is to have predictable effects on inflation and real output. In most developed and developing countries, policymakers have frequently questioned whether the demand for money is stable. Generally, the majority of studies find that the demand for money is unstable and monetary aggregates have lost their influence in the conduct of monetary policy. In Fiji, for some time, the role of monetary aggregates as intermediate targets has been downplayed. However, there has been renewed interest in the stability of the demand for money in Fiji and so this paper’s objective is to re-examine this topical issue. Because of ongoing financial sector reforms1, the determinants of money demand in Fiji will be difficult to establish. Nevertheless, this paper aims to provide a sound theoretical and empirical basis for modeling the demand for money. This paper employs co-integration analysis to examine the stability of the demand for money. Additionally, the error correction technique is also used to confirm the findings of the co-integration analysis.