The demand for money in Kenya: a test of the Mckinnon-shaw model

Abstract

This paper examines the relevance and suitability of the Mckinnon- Shaw model for money demand in Kenya and the implications for monetary policy administration. The results reported show that there exists significant complementarity effects between money assets and other physical assets in the Kenyan economy. The paper shows that the real demand for money in Kenya is considerably influenced by real income, return on physical assets and the return on money assets. The results further indicates that the broad definition of money(M2) performs better than Ml or M3 in the specification of money demand function. The results also indicates that there is no significant difference in real demand for money when current actual and expected income are used. Based on these findings, the paper concludes that the Mckinnon-Shaw model is appropriate and suitable for the Kenyan economy. Policy administrators should therefore consider all the three variables when they want to control the demand for money in Kenya.