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Abstract

This paper searches an appropriate proxy for opportunity cost of holding money. We apply a balance panel data for selected developed and developing countries during the period of 1990-2008. Three models have been estimated for each group of the countries. Both random and fixed effect models have been applied. The results show that inflation rate is a good proxy for opportunity cost of holding money in the developing countries. This fact is probably the caused of inefficiency in financial markets. However, for developed countries both inflation rate and interest rate should apply as opportunity cost of holding money. When interest rate is a good proxy for opportunity cost of holding money and bonds, we can conclude that there is a competitive market in the financial market. On the other hand, we can consider the inflation rate as a proxy for durable goods and foreign currency.

JEL classification: E41, E58

Keywords: Demand for money; Opportunity cost of holding money; Financial markets; panel data

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The demand for money is a basic concept in macroeconomics. This considers the tendency of people for maintaining money. The demand for money function indicates the variables that affect on the demand for money such as interest rate, income, wealth and so on. Macroeconomic analysis show that certain demand for money characteristics could influence monetary policies such as the interest elasticity of the demand for money and the stability of the demand for money Hosseini and Bakhshi (2006). Hence, many researches in this domain in confident countries have been done. Since, this fact affects monetary policies then we need to understand of the detail of the demand for money.

In macroeconomics literature the demand for money focuses on two subjects: speculative demand and opportunity cost of holding money. Usually, opportunity cost is more important. Mostafavi and Yavari (2005). The aim of this paper is to find a good proxy for opportunity cost of holding money. The researches in this way show that a good variable for opportunity cost of holding money depends on financial market development. The structure of financial market in the developed and the developing countries is different for this reason we search the proxies according to these countries. We apply three...

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