Permanent Income, Inflation Expectations and the Money Demand Function in Developing Countries

Abstract

Using the Adaptive Expectations Model and the method of minimising quadratic loss function this paper explores the relevant scale and opportunity cost variables in the money demand function of six developing countries of Asia. It is found that substitution of permanent income for measured income and of expected inflation for actual inflation does not generally improve the estimates of money demand function. Furthermore, the demand for money is found to be sensitive to changes in interest rate for some countries.