Determinants and Stability of Money Demand in the Middle East and North Africa: An Empirical Study Using Time Series Models During the period 1990–2023

Abstract

This study aims to analyze the determinants of the money demand function and assess its stability in the economies of the Middle East and North Africa (MENA) region during the period 1990–2023. The research adopts the Dynamic Ordinary Least Squares (DOLS) methodology for each country individually, Furthermore, the CUSUM and CUSUMSQ structural stability tests were employed to evaluate the stability of the money demand function and to trace its evolution over time.The findings reveal a statistically significant positive relationship between real GDP and money demand, although the magnitude of this effect varies between oil-exporting and non-oil economies. The results also indicate a negative relationship between interest rates and money demand, although this effect appears weaker in countries with underdeveloped banking systems. As for the exchange rate, the impact is mixed—positive in countries with monetary stability, and negative in those experiencing severe currency fluctuations. Moreover, the stability tests confirm the presence of structural shifts in the money demand function across several countries, reflecting their exposure to economic and political shocks. These findings underscore the importance of adopting flexible and forward-looking monetary policies that can adapt to both internal and external shocks. It is also essential that such policies be designed in alignment with each country’s institutional and economic characteristics. While economies with more advanced financial systems may rely on conventional monetary tools, those with underdeveloped financial markets should focus on enhancing financial inclusion and developing alternative instruments to improve the effectiveness of monetary policy.