Economic policy uncertainty and the UK demand for money: evidence from the inter-war period

Choudhry, Taufiq (2023) Economic policy uncertainty and the UK demand for money: evidence from the inter-war period. Journal of Economic Studies. (doi:10.1108/JES-03-2022-0167).

Record type: Article

Abstract

Purpose
This paper empirically investigates the effect of economic policy uncertainty (EPU) on the UK money demand stability during the inter-war period (1920–1938). Both a narrow definition (M0) and a broad definition (M3) of money are investigated.

Design/methodology/approach
The empirical investigation is conducted by employing the autoregressive distributed lag (ARDL) bounds testing approach to cointegration.

Findings
Results presented indicate a stable demand for both definitions of money only when EPU is included as one of the determinants of demand function. The EPU imposes a negative effect on the demand for both definitions of money. The causality test results further indicate long- and short-term causality from the determinants (including EPU) to both forms of money demand.

Practical implications
Significant presence of the economic uncertainty weakens the effects of the monetary policy on the economy.

Originality/value
This is a historical economics paper. Given the turmoil and uncertainty associated with the inter-war period, an empirical investigation of UK money demand is an interesting exercise. This is the first such paper.