INFLATION AND THE DEMAND FOR MONEY IN DEVELOPING-COUNTRIES

The sensitivity of money holdings to yield is an important issue for financial sector reform. For low-income developing countries, this sensitivity has been judged mainly on the basis of demand studies which use inflation as the opportunity cost of holding money. But researchers have generally neglected the fact that, because changes in prices may appear in dynamic demand for money equations even if the demand for money is not yield sensitive, it is not normally possible to make valid inferences about the inflation sensitivity of equilibrium demand for money. The severity of the problem is illustrated by reference to Ghana and China.