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Money-income Link in Developing Countries: a Heterogeneous Dynamic Panel Data Approach

Azhar Iqbal and Muhammad Sabihuddin Butt
The Pakistan Development Review
Vol. 42, No. 4, Papers and Proceedings PART II Nineteenth Annual General Meeting and Conference of the Pakistan Society of Development Economists Islamabad, January 13-15, 2004 (Winter 2003), pp. 987-1014
Stable URL: http://www.jstor.org/stable/41260450
Page Count: 28
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Money-income Link in Developing Countries: a Heterogeneous Dynamic Panel Data Approach
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Abstract

In this paper we test for existence of the link between money and income, using data from 15 developing countries for the period 1971-2001. Country-by-country and panel results are presented according to Johansen multivariate likelihood-based inference and new panel unit root test, panel cointegration test, and panel causality test. The panel cointegration result indicates that money and income have a stable long-run relationship. The results based on recently-developed panel causality tests show heterogeneous bi-directional causality between money and income in some countries of the panel.Our findings also clearly demonstrate that causality patterns vary across countries and, therefore, highlight the dangers of statistical inference based on cross-country studies, which implicitly treat different economies as homogeneous entities. Consequently, money neutrality is ascertained at individual country level.

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