The effectiveness of monetary policy and money demand function stability in a developing economy : empirical evidence from the state of Kuwait

Abstract EN

A stable money demand function plays a vital role in the analysis of macroeconomics, especially in the planning and implementation of monetary policy.

This paper aims to examine the stability and behavior of the money demand function in Kuwait during two different periods.

Where the first period extent between the first quarter of the year 1980 until the fourth quarter of the year 1998, which represents the political instability in the Arabian Gulf area.

The second period between the first quarter of the year 1999 until the second quarter of the year 2018, and this period represents the political stability in the State of Kuwait.

Hence, the real money balances (M1) is used by the error-correction models (ECM) technique to explain the short-run stability and behavior of M1, where ordinary least squares (OLS) technique is used to explain the stability and the behavior of M1 in long-run.

The function of demand for money for Kuwait, whether short-term or long-term, is stable between the first quarter of the year 1999 and the second quarter of 2018, as well as stability in the full data between the first quarter of 1980 and the second quarter of 2018, which means that monetary policy is effective during these periods according to the estimated results of these functions.