Inflation variability and money demand in developing countries

This study provides international evidence regarding the effect of inflation variability on money demand in developing countries. Blejer and Khan have suggested that inflation variability has a negative effect in countries with high and erratic inflation and a positive effect in economies with low and stable inflation. The results of this paper clearly reject their hypothesis: a positive effect is found even for high inflation economies and a negative effect is found for some low inflation countries. Additional findings regarding money demand in developing countries reveal: 1) The long run income elasticity of money demand is in most cases above one; 2) inflation has a negative significant effect on money demand in most of the sample countries; and 3) the speed of adjustment of money balances to their desired level is not negligible in developing countries as argued by some authors. In half of the sample economies the average adjustment period exceeds one year.