Assessing the Role of Advertising Expenditure in Money Demand Function Using
Alternative Monetary Aggregations
Hiew Lee Chea
Doctor of Philosophy 2015
Faculty of Economics and Business
UNIV
ER
SITI
MALAYSIA
SARA
WAK
U N I M AS
Faculty of Economics and Business
Assessing the Role of Advertising Expenditure in Money Demand Function Using
Alternative Monetary Aggregations
Hiew Lee Chea
A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy
Faculty of Economics and Business
UNIVERSITI MALAYSIA SARAWAK 2015
AUTHOR’S DECLARATION I declare that the work in this thesis was carried out in accordance with the
regulations of Universiti Malaysia Sarawak. It is original and is the result of my
work, unless otherwise indicated or acknowledged as referenced work. This thesis
has not been submitted at Universiti Malaysia Sarawak or to any other academic
institution or non-academic institution for any other degree or qualification. Name of Student : Hiew Lee Chea
Student ID No : 12010036
Programme Degree : Doctor of Philosophy
Faculty : Faculty of Economics and Business
Thesis Title : Assessing the Role of Advertising Expenditure in Money
Demand Function Using Alternative Monetary Aggregations Signature of Student :
Date :
i
ABSTRACT
Assessing the Role of Advertising Expenditure in Money Demand Function
Using Alternative Monetary Aggregations
Hiew Lee Chea
Over the last decade, Brazil, Russia, India and China (BRIC countries) have experienced
the fastest and most active economic growth among emerging countries. However, the
rapid financial developments in these countries have altered their monetary policy channels
and threatened the stability of their money demand functions. To formulate a more credible
and well-defined money demand function (MDF), the potential regressee and regressors
must be identified. In this thesis, a non-traditional regressor, the advertising expenditure
(ADEX) variable, was incorporated in the estimation of MDF for BRIC countries. In
addition, to compare the performance of other alternative monetary aggregates for BRIC
countries’ MDF, the simple-sum, Divisia and currency-equivalent (CE) money for both
M1 and M2 were included in the analyses. For this purpose, the indices and monetary
aggregates for Divisia and CE were then constructed using a “self-developed” data
template. The impact of the role of ADEX on BRIC countries' MDF and the performance
of monetary aggregates were examined with an autoregressive distributed lag (ARDL)
approach. Supportive evidence for the use of ADEX in formulating the MDF for BRIC
countries was found. Empirical findings indicated that ADEX can positively influence the
demand for money in both the short and long term, as in the case of BRIC countries.
Moreover, use of the Divisia M2 (DM2) monetary aggregate in MDF was superior to the
other monetary aggregates since more plausible results that were consistent with a priori
theory were generated in the case of Brazil, India and China. For Russia, both Divisia M1
ii
(DM1) and DM2 monetary aggregates outperformed their simple-sum counterpart and CE
aggregates. Therefore, the present thesis adds to the existing body of knowledge on MDF
by empirically exploring the impact of ADEX on money demand and on this proposed
variable, which can be considered a non-traditional regressor for the estimation of MDF in
future research. Furthermore, the significance of Divisia monetary aggregates must be
highlighted, especially in generating a sound MDF and for monetary policy
implementation purposes. By and large, a better understanding of the cause and effect of
the demand for money may help policymakers in devising the best monetary policy for a
country.
iii
ABSTRAK
Menilai Peranan Perbelanjaan Pengiklanan dalam Fungsi Permintaan Wang
dengan Menggunakan Pengagregatan Monetari Alternatif
Hiew Lee Chea
Sejak sedekad yang lalu, Brazil, Rusia, India dan China (negara BRIC) telah
mengalami pertumbuhan ekonomi yang paling cepat dan aktif di kalangan negara-
negara membangun. Walau bagaimanapun, perkembangan kewangan yang pesat di
negara ini telah mengubah saluran dasar-dasar monetarinya dan mengancam
kestabilan fungsi permintaan wang (FPW). Untuk menghasilkan FPW yang lebih
berwibawa dan mempunyai takrif yang jelas, pembolehubah bersandar and
pembolehubah bebas yang berkemungkinan harus dikenal pasti. Dalam kajian ini,
pembolehubah bebas “bukan tradisional” yang penting dan diabaikan selama ini,
iaitu, perbelanjaan pengiklanan (ADEX) akan dimasukkan ke dalam penaksiran
FPW bagi negara BRIC masing-masing dengan menggunakan analisis siri masa. Di
samping itu, untuk membandingkan prestasi agregat monetari alternatif dalam FPW
bagi negara BRIC, agregat penambahan mudah, Divisia dan currency-equivalent
(CE) bagi kedua-dua penawaran wang M1 dan M2 akan dimasukkan ke dalam
analisis. Untuk tujuan ini, indeks dan agregat monetari untuk Divisia dan CE akan
dibina dengan menggunakan templat data yang dihasilkan oleh penulis. Peranan
pembolehubah ADEX terhadap FPW bagi negara BRIC dan prestasi agregat monetari
telah dianalisis dengan pendekatan autoregresif lat teragih (ARDL). Bukti sokongan
bagi penggunaan pembolehubah ADEX dalam penentuan FPW di negara BRIC
telah didapati. Penemuan empirikal menunjukkan bahawa pembolehubah ADEX
iv
boleh mempengaruhi permintaan wang secara positif dalam kedua-dua jangka
pendek dan jangka panjang bagi kes negara BRIC. Selain itu, penggunaan agregat
Divisia M2 (DM2) di dalam FPW didapati lebih unggul daripada agregat monetari
yang lain di mana DM2 dapat menghasilkan keputusan yang lebih munasabah dan
selaras dengan teori terdahulu bagi kes di Brazil, India dan China. Bagi Russia,
kedua-dua agregat Divisia M1 (DM1) dan DM2 menunjukkan prestasi yang lebih
baik daripada agregat penambahan mudah dan CE. Oleh itu, tesis ini menambah
kepada pengetahuan yang sedia ada mengenai kajian FPW melalui penerokaan secara
empirik bagi kesan ADEX terhadap permintaan wang, dan mencadangkan bahawa
pembolehubah ini boleh dikenali sebagai pembolehubah bebas “bukan tradisional”
bagi penaksiran FPW untuk penyelidikan pada masa depan. Selain daripada itu,
kepentingan Divisia agregat monetari perlu ditekan khususnya dalam penjanaan
FPW yang kukuh dan untuk tujuan pelaksanaan dasar monetari. Secara
keseluruhannya, pemahaman yang lebih terperinci mengenai sebab dan akibat
permintaan wang boleh membantu pembuat dasar dalam merangka dasar monetari
yang kukuh untuk negaranya.
v
ACKNOWLEDGEMENTS First and foremost, I am especially grateful to my supervisor, Associate Professor
Dr. Puah Chin Hong, who has guided and supervised me with due diligence. His
valuable guidance, patience, understanding, and unremitting support in the process of
completing this thesis will always be remembered. My gratitude also extends to my
co-supervisors, Associate Professor Dr. Liew Khim Sen and Associate Professor
Dr. Mohamad Jais, for their valuable comments. Also, I would like to thank Dr.
Tang Tuck Cheong for his helpfulness and advices, as well as Professor Dr. William
A. Barnett and Professor Dr. Jose Angelo Divino for their recommendations.
Additionally, I would like to express my sincere “thank you” to my family
members. This study would not be successfully completed without their moral and
physical support. I am grateful for their contributions and sacrifices during the
writing period of this thesis. Without you all, treading through this difficult
journey would be a difficult and lonely one. Also, not forgetting my friends who
have directly and indirectly extended their helping hands in completing this thesis, I
wish you all the best in your future undertakings!
Last but not least, I would like to extend my appreciation to the MOE
MyBrain15, Zamalah Pascasiswazah Universiti Malaysia Sarawak (ZPU) and
MOHE Fundamental Research Grant Scheme [FRGS/05(17)/730/2010(16)] for their
financial support. Besides, I would also like to thank the staff from Faculty of
Economics and Business as well as Centre of Graduate Studies of UNIMAS for
giving me due guidance and advices in the submission of this thesis. A simply ‘thank
you’ will never be sufficient to express my sincere gratitude.
vi
TABLE OF CONTENTS
AUTHOR'S DECLARATION..................................................................................................i
ABSTRACT...............................................................................................................................ii
ABSTRAK ................................................................................................................................iv
ACKNOWLEDGMENTS.......................................................................................................vi
TABLE OF CONTENTS.......................................................................................................vii
LIST OF TABLES..................................................................................................................xii
LIST OF FIGURES...............................................................................................................xiv
LIST OF APENDIX................................................................................................................xv
LIST OF ABBREVIATIONS...............................................................................................xvi
CHAPTER ONE
INTRODUCTION
1.0 Overview .................................................................................................................... 1
1.1 Problem Statement ..................................................................................................... 3
1.2 Motivation of the Thesis .......................................................................................... 13
1.3 Contributions of the Thesis ...................................................................................... 19
1.4 Objective of the Thesis ............................................................................................ 21
1.5 Thesis Outline .......................................................................................................... 22
CHAPTER TWO
BACKGROUND ON BRIC COUNTRIES – ECONOMIC DEVELOPMENT,
EVOLUTION OF MONETARY POLICY AND FINANCIAL REFORMS
2.0 Introduction .............................................................................................................. 23
2.1 Economic Development ........................................................................................... 24
2.2 Evolution of Monetary Policy and Financial Reforms ............................................ 30
2.2.1 Brazil .................................................................................................................. 32
2.2.2 Russia ................................................................................................................. 46
2.2.3 India ................................................................................................................... 65
2.2.4 China .................................................................................................................. 76
2.2.5 Synopsis ............................................................................................................. 91
2.3 Concluding Remarks ................................................................................................ 95
vii
CHAPTER THREE
THEORETICAL LITERATURE REVIEW
3.0 Introduction .............................................................................................................. 98
3.1 Classical Quantity Theory ........................................................................................ 98
3.1.1 Fisher's Equation of Exchange ........................................................................... 99
3.1.2 Cambridge Approach ....................................................................................... 101
3.2 Keynes’s Liquidity Preference Theory .................................................................. 103
3.3 Post-Keynesian Theories of Money Demand ........................................................ 106
3.3.1 Inventory-Theoretical Approach ...................................................................... 106
3.3.2 Precautionary Demand for Money Approach .................................................. 109
3.3.3 Buffer-Stock/Portfolio Model .......................................................................... 110
3.3.4 Consumer Theory Approach ............................................................................ 111 3.3.4.1 Extensions of the Consumer Theory Approach ........................................... 114
3.4 Concluding Remarks .............................................................................................. 123
CHAPTER FOUR
EMPIRICAL LITERATURE REVIEW
4.0 Introduction ............................................................................................................ 125
4.1 Empirical Issues ..................................................................................................... 125
4.1.1 The Money Stock Definition/Monetary Aggregations .................................... 126 4.1.1.1 Simple-Sum Aggregation ............................................................................. 127 4.1.1.2 Divisia Aggregation ..................................................................................... 130 4.1.1.3 Currency-Equivalent Aggregation ............................................................... 133
4.1.2 Choice of Variables .......................................................................................... 135 4.1.2.1 Scale Variable .............................................................................................. 136 4.1.2.2 Opportunity Cost Variables ......................................................................... 138
4.1.3 Methodology .................................................................................................... 143 4.1.3.1 Functional Forms ......................................................................................... 143 4.1.3.2 Specification Issues ...................................................................................... 145 4.1.3.3 Estimation Techniques ................................................................................. 150
4.2 Empirical Evaluation ............................................................................................. 157
4.2.1 Review of the Role of Advertising Expenditure .............................................. 158 4.2.1.1 Macroeconomics Aspects ............................................................................ 160 4.2.1.2 Business Aspects .......................................................................................... 164
4.2.2 Review of Monetary Aggregates and the Money Demand Function ............... 168 4.2.2.1 BRIC Countries ............................................................................................ 169 4.2.2.2 Non-BRIC Countries ................................................................................... 186
4.3 Concluding Remarks .............................................................................................. 198
viii
CHAPTER FIVE
METHODOLOGY
5.0 Introduction ............................................................................................................ 205
5.1 Theoretical Framework .......................................................................................... 205
5.1.1 Money Stock/Monetary Aggregation ............................................................... 206
5.1.2 Scale Variable .................................................................................................. 208
5.1.3 Opportunity Cost of Holding Money ............................................................... 209 5.1.3.1 Own-rate Return for Money ......................................................................... 210 5.1.3.2 Yields of Alternative Assets ........................................................................ 211
5.1.4 Other Influential Factor – Advertising Expenditure .............................................. 217
5.2 Functional Forms ................................................................................................... 220
5.2.1 General Money Demand Function .................................................................... 220
5.2.2 Money Demand Functions for BRIC Countries............................................... 221
5.3 The Construction of Statistical Indices Numbers................................................... 224
5.3.1 User Costs ........................................................................................................ 225
5.3.2 Divisia Index .................................................................................................... 229
5.3.3 Currency-Equivalent Index .............................................................................. 232
5.4 Data Description and Sources ................................................................................ 234
5.5 Estimation Techniques ........................................................................................... 239
5.5.1 Unit Root Tests ................................................................................................ 240 5.5.1.1 Augmented Dickey-Fuller............................................................................ 241 5.5.1.2 Phillips-Perron ............................................................................................. 243 5.5.1.3 Ng and Perron .............................................................................................. 244
5.5.2 Autoregressive Distributed Lag Approach ...................................................... 246 5.5.2.1 ARDL Bounds Test ...................................................................................... 247 5.5.2.2 ARDL Level Relationship Model ................................................................ 250
5.5.3 Model Diagnostic Inspection ............................................................................ 251 5.5.3.1 Inspection of Residuals ................................................................................ 251 5.5.3.2 Stability Analysis ......................................................................................... 254
5.6.4 Granger Causality Test ..................................................................................... 255
5.7 Concluding Remarks .............................................................................................. 256
ix
CHAPTER SIX
EMPIRICAL RESULTS
6.0 Introduction ............................................................................................................ 257
6.1 Preliminary Tests ................................................................................................... 257
6.1.1 Comparison of Alternative Monetary Aggregates ........................................... 258
6.1.2 Plots of Variables ............................................................................................. 264
6.1.3 Integration Properties of the Variables ............................................................ 271 6.1.3.1 Brazil ........................................................................................................... 273 6.1.3.2 Russia ........................................................................................................... 275 6.1.3.3 India ............................................................................................................. 278 6.1.3.4 China ........................................................................................................... 280
6.2 Empirical Results ................................................................................................... 282
6.2.1 Brazil ................................................................................................................ 285 6.2.1.1 Bounds Test ................................................................................................. 286 6.2.1.2 ARDL Model and Model Diagnostic Inspection ......................................... 288 6.2.1.3 Long-Run Coefficient Estimates Based on the ARDL Approach................ 293 6.2.1.4 Error Correction Model ................................................................................ 296 6.2.1.5 Granger Causality Test................................................................................. 299
6.2.2 Russia ............................................................................................................... 301 6.2.2.1 Bounds Test ................................................................................................. 302 6.2.2.2 ARDL Model and Model Diagnostic Inspection ......................................... 302 6.2.2.3 Long-Run Coefficient Estimates Based on the ARDL Approach ................ 307 6.2.2.4 Error Correction Model ................................................................................ 309 6.2.2.5 Granger Causality Test................................................................................. 311
6.2.3 India ................................................................................................................. 312 6.2.3.1 Bounds Test ................................................................................................. 313 6.2.3.2 ARDL Model and Model Diagnostic Inspection ......................................... 314 6.2.3.3 Long-Run Coefficient Estimates Based on the ARDL Approach ................ 319 6.2.3.4 Error Correction Model ................................................................................ 321 6.2.3.5 Granger Causality Test................................................................................. 322
6.2.4 China ................................................................................................................ 324 6.2.4.1 Bounds Test ................................................................................................. 325 6.2.4.2 ARDL Model and Model Diagnostic Inspection ......................................... 326 6.2.4.3 Long-Run Coefficient Estimates Based on the ARDL Approach................ 331 6.2.4.4 Error Correction Model ................................................................................ 334 6.2.4.5 Granger Causality Test................................................................................. 336
6.2.5 Performance Evaluation ................................................................................... 337
6.3 Summary and Concluding Remarks ...................................................................... 341
x
CHAPTER SEVEN
SUMMARY, RECOMMENDATIONS AND POLICY IMPLICATIONS,
LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH
AND CHALLENGES
7.0 Introduction ............................................................................................................ 344
7.1 Summary of the Thesis .......................................................................................... 345
7.2 Recommendations and Policy Implications ........................................................... 350
7.3 Limitations and Suggestions for Future Research ................................................. 353
7.4 Challenges .............................................................................................................. 355
RERERENCES.....................................................................................................................357
APPENDIX.................................................................................................................................374
xi
LIST OF TABLES
Table Title Page
1.1 Household Final Consumption Expenditure (HFCE) in BRIC Countries (2011-2013)
6
1.2 Population in BRIC Countries (as of 2013) 14
1.3 Top Ten Advertising Market in the World (US$ million, current price) 16
1.4 Advertising Expenditure in BRIC Countries (2011-2013) 17
2.1 Short Term Outlook – Real GDP Growth 26
2.2 Short Term Outlook – Top Ten Largest Countries in the World 27
2.3 Long Term Outlook – BRIC Countries Move Up USD-denominated GDP Rankings
29
2.4 Brazil's Monetary Policy Evolution (1995-2013) 33
2.5 Inflation Targeting and Actual Inflation Rate in Brazil (1999-2015) 40
2.6 Russia's Monetary Policy Evolution (1992-2013) 47
2.7 Inflation Targeting and Actual Inflation Rate in Russia (2006-2016) 62
2.8 India's Monetary Policy Evolution (1975-2013) 66
2.9 Monetary Targeting in India (1985/1986-1997/1998) 71
2.10 Multiple Indicator Approach in India: Projections versus Achievements 74
2.11 Monetary Policy Instruments in China: 1986:Q1-2013:Q4 78
2.12 China’s Monetary Aggregates' Targeted and Actual Growth Rate (1996-2011) 82
2.13 Reserve Requirement Ratio (RRR) in PBC 83
4.1 Summary of the Related Literature Review of the Role of Advertising Expenditure in Affecting Macroeconomics and Business Aspects
158
4.2 Summary of the Related Literature Review of Monetary Aggregates and Money Demand Model for BRIC Countries
180
4.3 Summary of the Related Literature Review of Monetary Aggregates and Money Demand Model for Non-BRIC Countries
196
4.4 Use of the Scale Variable and Monetary Aggregation(s) as well as Comparison of Monetary Aggregations (MAs) in BRIC and Non-BRIC Countries
202
5.1 Short-Term Interest Rate Proxies 211
5.2 Monetary Component, Corresponding Interest Rate Proxies and Benchmark Rate
227
5.3 Data Used in BRIC Countries' Money Demand Functions 236
xii
LIST OF TABLES (CONT'D)
Table Title Page
5.4 Monetary Asset Stock Data Used in the Definitions of Monetary Aggregates 238
5.5 Aggregate Advertising Expenditure for BRIC Countries (US$ million) 239
6.1 Unit Root Test Results for Brazil 274
6.2 Unit Root Test Results for Russia 276
6.3 Unit Root Test Results for India 278
6.4 Results of Unit Root Tests for China 280
6.5 Results for the Bounds Testing Approach to Cointegration for Brazil 287
6.6 ARDL Estimates and Model Diagnostic Inspection for Brazil 290
6.7 Long-Run Coefficient Estimates for Brazil's Money Demand Function 295
6.8 Error Correction Model for Brazil 297
6.9 Results of Granger Causality Tests for Brazil 300
6.10 Results for the Bounds Testing Approach to Cointegration for Russia 302
6.11 ARDL Estimates and Model Diagnostic Inspection for Russia 304
6.12 Long-Run Coefficient Estimates for Russia's Money Demand Function 308
6.13 Error Correction Model for Russia 310
6.14 Results of Granger Causality Test for Russia 312
6.15 Results for the Bounds Testing Approach to Cointegration for India 314
6.16 ARDL Estimates and Model Diagnostic Inspection for India 316
6.17 Long-Run Coefficient Estimates for India's Money Demand Function 319
6.18 Error Correction Model for India 322
6.19 Results of Granger Causality Test for India 323
6.20 Results for the Bounds Testing Approach to Cointegration for China 325
6.21 ARDL Estimates and Model Diagnostic Inspection for China 328
6.22 Long-Run Coefficient Estimates for China's Money Demand Function 333
6.23 Error Correction Model for China 335
6.24 Results of Granger Causality Test for China 337
6.25 Performance Evaluation of BRIC Countries' Money Demand Functions 339
7.1 Achievement of Objectives and Summary of Findings 349
xiii
LIST OF FIGURES
Figure Title Page
2.1 Expansion of Multiple Indicator Approach 72
5.1 General Conceptual Framework of Money Demand 206
5.2 Process from ADEX to HFCE in Increasing Demand for Money 219
6.1 Simple-sum, Divisia and CE M1 in Brazil (1999:Q1-2012:Q4) 260
6.2 Simple-sum, Divisia and CE M2 in Brazil (1999:Q1-2012:Q4) 260
6.3 Simple-sum, Divisia and CE M1 in Russia (2001:Q1-2012:Q4) 261
6.4 Simple-sum, Divisia and CE M2 in Russia (2001:Q1-2012:Q4) 261
6.5 Simple-sum, Divisia and CE M1 in India (1999:Q1-2012:Q4) 262
6.6 Simple-sum, Divisia and CE M2 in India (1999:Q1-2012:Q4) 262
6.7 Simple-sum, Divisia and CE M1 in China (1991:Q1-2012:Q4) 263
6.8 Simple-sum, Divisia and CE M2 in China (1991:Q1-2012:Q4) 263
6.9 Plots of Variables for Brazil (1999:Q1-2012Q4) 267
6.10 Plots of Variables for Russia (2001:Q1-2012Q4) 268
6.11 Plots of Variables for India (1999:Q1-2012Q4) 269
6.12 Plots of Variables for China (1991:Q1-2012Q4) 270
xiv
LIST OF APPENDX
Appendix Title
A Simpson's Parabolic Interpolation Technique
xv
LIST OF ABBREVIATIONS
ADEX Advertising Expenditure
ADF Augmented Dickey-Fuller
AIC Akaike Information Criterion
ARCH Autoregressive Conditional Heteroskedasticity
ARDL Autoregressive Distributed Lag
BACEN Banco Central Do Brasil
BI Bank Indonesia
BOP Balance of Payments
BOVESPA São Paulo Stock Exchange Index
BRIC Countries Brazil, Russia, India and China
BRICS Brazil, Russia, India, China and South Africa
BSM Buffer-Stock Model
C Cash
CBR Central Bank of Russia
CC Currency in Circulation
CDs Certificate of Deposits
CE Currency-equivalent
CEIC Census Economic and Information Center
CEM1 Currency-equivalent M1
CEM2 Currency-equivalent M2
CEMA Currency-equivalent Monetary Aggregate
CEMAS Currency-equivalent Monetary Aggregates
CENSUS X-11 Census Bureau’s X-11 Seasonal Adjustment Program
CENSUS X-12 Census Bureau’s X-12 Seasonal Adjustment Program
CLIs Composite Leading Indicators
CMM Call Money Market
CMN National Monetary Council
COB Currency Outside Banks
COPOM Monetary Policy Committee
CP Currency with the Public
CPC Communist Party of China
CPI Consumer Price Index
CPI2005 CPI Base Year 2005
CRR Cash Reserve Ratio
CU Currency with Public
xvi
LIST OF ABBREVIATIONS (CONT'D)
CUSUM Cumulative Sum
CUSUM2Q Cumulative Sum of Squares Stability
DD Net Demand Deposits with All Commercial and Co-operative Banks
DF-GLS Dickey-Fuller Generalised Least Square
DFHI Discount and Finance House of India
DISR Discount Rates
DMs Developed Markets
DM1 Divisia M1
DM2 Divisia M2
DM3 Divisia M3
DMA Divisia Monetary Aggregate
DMAS Divisia Monetary Aggregates
DOLS Dynamic Ordinary Least Squares
DR Deposit Rates
DSP Difference-Stationary Process
ECM Error Correction Model
ECM WALD Test Granger-causality Test based on VECM
ECT Error Correction Term
ECTs Error Correction Terms
ERS Elliot, Rothenberg and Stock
EM Emerging Market
EMs Emerging Markets
FCTBR Foreign Currency Treasury Bill Rate
FD-GMM First-Differenced Generalised Method of Moments
FDI Foreign Direct Investment
GARP Generalized Axiom of Revealed Preference
GDE Gross Domestic Expenditure
GDP Gross Domestic Product
GKOS Government Short-term Commitments
GNI Gross National Income
GNP Gross National Product
HFCE Household Final Consumption Expenditure
ICB Independent Central Bank
IFS International Financial Statistics
IMF International Monetary Fund
xvii
LIST OF ABBREVIATIONS (CONT'D)
IPCA Broad National Consumer Price Index
IPI Industrial Production Index
JB Jarque-Bera
LB Ljung-Box
LIBOR London Interbank Offered Rate
LM Lagrange Multiplier
ln Natural Logarithms
logs Logarithms
MA Moving Average
ME Mean Error
MIA Multiple Indicator Approach
MMR Money Market Rates
MQ Monetary Velocity Aggregate
MSI Monetary Service Index
MSS Market Stabilisation Scheme
MWALD Modified Wald
NDTLs Net Demand and Time Liabilities
NEER Nominal Effective Exchange Rate
NEX Nominal Exchange Rate
NNP National Product
NP Ng and Perron
OFZs Federal Loan Obligations
OLS Ordinary Least Squares
OMOs Open Market Operations
OMR Overnight Market Interest Rates
PAM Partial-Adjustment Model
PBC People's Bank of China
PD Post Office Savings Deposits
PDL Polynomial Distributed Lag
PIM Pure Interbank Market
PP Philips-Perron
PPP Purchasing Power Parity
QHD Qard Hasan Demand
R&D Research and Development
RADEX Aggregate Advertising Expenditure Measured in Real Term
xviii
LIST OF ABBREVIATIONS (CONT'D)
RBI Reserve Bank Of India
RCEM1 Currency-equivalent M1 Measured in Real Term
RCEM2 Currency-equivalent M2 Measured in Real Term
RCENM1 Currency-equivalent NM1 Measured in Real Term
RCENM2 Currency-equivalent NM2 Measured in Real Term
RDM1 Divisia M1 Measured in Real Term
RDM2 Divisia M2 Measured in Real Term
RDNM1 Divisia NM1 Measured in Real Term
RDNM2 Divisia NM2 Measured in Real Term
REER Real Effective Exchange Rate
REPOs Repurchase Agreements
RESET The Regression Specification Error Test
REX Real Exchange Rate
RHFCE Household Private Consumption Measured in Real Term
RMSE Recursive Mean Square Error
ROW Rest of the World
RRR Reserve Requirement Ratio
RSSM1 Simple-sum M1 Measured in Real Term
RSSM2 Simple-sum M2 Measured in Real Term
RSSNM1 Simple-sum NM1 Measured in Real Term
RSSNM2 Simple-sum NM2 Measured in Real Term
RST Regime-Switching Space-Time
SA Seasonal Adjusted
SC Schwarz Bayesian Criterion
SELIC Sistema Especial de Liquidação e Custodia
SIC Schwarz Information Criterion
SLR Statutory Liquidity Ratio
SOES State-Owned Enterprises
SSM1 Simple-sum M1
SSM2 Simple-sum M2
SSM3 Simple-sum M3
SSMA Simple-sum Monetary Aggregate
SSMAS Simple-sum Monetary Aggregates
T-bill Treasury Bill
T-bills Treasury Bills
xix
LIST OF ABBREVIATIONS (CONT'D)
TBR Treasury Bill Rate
TBR3M Treasury Bill Rate (3 Month)
TD Net Time Deposits with All Commercial as well as Co-operative Banks
TSP Trend-Stationary Process
UECM Unrestricted Error Correction Model
UK United Kingdom
US United States
USTBR US Treasury Bill Rate
VAR Vector Autoregressive
WPI Wholesale Price Index
WTO World Trade Organization
xx
CHAPTER ONE
INTRODUCTION
1.0 Overview
Boom-busts during the 1950s until the 1970s have been regarded as a valuable
economic lesson around the world. To dampen inflation, the money supply had to be
controlled by central banks worldwide and, indeed, this has been done since the 1980s.
Nevertheless, such measures have also placed unfavourable limitations on direct
manipulation of the money supply as the primary monetary instrument because of
factors such as the level of income or wealth, opportunity cost of holding money and
other future uncertainties which can affect the demand for money. All in all, it is
important to highlight that rapid financial developments may cause instability in the
money demand function and fluctuations in money demand will influence all aspects
of the economy. In particular, the destabilised demand for money has restrained the
effectiveness and predictability of monetary policies, driving monetary authorities in
many countries, including Brazil, Russia, India and China (also known as the original
BRIC countries), to shift their monetary targets. In these emerging markets, the
outcome of this shift is that the significance of money demand in relation to
formulating effective monetary policies caught the attention of scholars and disputed
research issues consequently gained the limelight.
1
In a continuing quest for a stable money demand function and ways to return
monetary aggregates to their rightful place as the key indicator for monetary policy
purposes, both theoretical and empirical grounds have been taken into account
because a shortage in the supply of money will cause market stagnation while an
over-supply may lead to inflation. Therefore, while searching for BRIC countries’
stable and well-defined money demand functions, some researchers have highlighted
certain traditional regressors. However, the position of the non-traditional regressor –
specifically, the variable of advertising expenditure (ADEX) in the money demand
function – has yet to become the focus. The estimations in this thesis were calculated
to derive a novel money demand function specification for BRIC countries based on
the extended consumer demand theory that Habibullah (2009) proposed, where the
non-traditional regressor was taken into consideration.
Throughout this thesis, the term advertising refers to the strategy that affects
consumer behaviour and induces higher household final consumption expenditure
(HFCE). From a business perspective, advertising is a useful instrument that is widely
used to alter the attitude or behaviour of the society towards its "need" or "want",
which is followed by a demand for money intended for spending. Before drawing any
conclusion or making any choices as to which product is necessary or worth spending
money on, consumers usually need sufficient and clear information to guide them. On
the other hand, economic analysis of advertising has also suggested that advertising
plays an important role in expanding HFCE, which is associated with a rising demand
for money for transaction purposes and a reduction in search costs.
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