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<p>This Study investigates the empirical question of whether opening up to international trade and finance alters the demand for money in developing economies. Using annual panel data of 24 developing countries from 1990 to 2022, along with disaggregated KOF Globalization Index, we examine whether the economic aspects of globalization have a different monetary impact than the composite index, which also takes social and political aspects into account. Three estimators are used to handle cross-sectional dependence, serial correlation, and heteroskedasticity: fixed effects with clustered robust standard errors, Driscoll–Kraay, and panel-corrected standard errors. The Durbin–Wu–Hausman test and a lagged specification are used to formally address reverse causality. The results are consistent across all estimators and both globalization measures. The increased openness considerably increases the demand for real money balances. The economic sub-index yields larger elasticities than the aggregate index, indicating that economic integration as the principal pathways through which openness alters monetary behavior. With near-unity elasticities, real income is the most powerful determinant, whereas inflation has a negative impact that is consistent with the inflation tax channel. Using the Bai-perron structural break analysis, two regime shifts are located; 1997 and 2007-08 corresponding to Asian financial crisis and Global financial crisis respectively. The sub-period estimation reveal that the positive openness effect is statistically non-existent before 2008 and materializes afterwards as developing economies deepen economic integration into global markets. Omitting openness in money demand models will produce systematic forecasting errors in an increasingly integrated economy.</p>

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The interplay of economic openness and money demand function: Evidence from selected developing countries

  • 期刊论文

  • 发表日期：

    2026年4月22日

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  • Peerzada Gh Mohammad,
  • Sajad Ahmad Rather

摘要

This Study investigates the empirical question of whether opening up to international trade and finance alters the demand for money in developing economies. Using annual panel data of 24 developing countries from 1990 to 2022, along with disaggregated KOF Globalization Index, we examine whether the economic aspects of globalization have a different monetary impact than the composite index, which also takes social and political aspects into account. Three estimators are used to handle cross-sectional dependence, serial correlation, and heteroskedasticity: fixed effects with clustered robust standard errors, Driscoll–Kraay, and panel-corrected standard errors. The Durbin–Wu–Hausman test and a lagged specification are used to formally address reverse causality. The results are consistent across all estimators and both globalization measures. The increased openness considerably increases the demand for real money balances. The economic sub-index yields larger elasticities than the aggregate index, indicating that economic integration as the principal pathways through which openness alters monetary behavior. With near-unity elasticities, real income is the most powerful determinant, whereas inflation has a negative impact that is consistent with the inflation tax channel. Using the Bai-perron structural break analysis, two regime shifts are located; 1997 and 2007-08 corresponding to Asian financial crisis and Global financial crisis respectively. The sub-period estimation reveal that the positive openness effect is statistically non-existent before 2008 and materializes afterwards as developing economies deepen economic integration into global markets. Omitting openness in money demand models will produce systematic forecasting errors in an increasingly integrated economy.