Money Supply, Money Demand and the Public Debt

By Invitation:

Dr Azar is Full Professor, Faculty of Business Administration and Economics, Haigazian University. The views expressed in this note are his and do not necessarily reflect the views of BLOMINVEST Bank.

The purpose of this study is to answer the following two empirical questions: was the public debt monetized, and did the public save more in Lebanese pounds, and set aside more money, to pay for the future taxes that the origination of the debt entails? The first question considers the effect of the public debt on the money supply creation. If the debt explains money supply creation with a positive and statistically significant relation, then the debt is monetized. The second question involves the effect of the public debt on money demand. If the debt explains money demand with a positive and statistically significant relation, then Ricardian equivalence is validated, meaning that the public is saving more, in Lebanese pounds, to repay the debt with future taxes[1].

[1] In Keynesian money demand functions, the demand for money is undertaken for transaction, precautionary, and speculative purposes. Though transaction balances relate to consumption, precautionary and speculative balances relate to savings, with the former more so and in line with Ricardian Equivalence.

 

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Money Supply, Money Demand and The Public Debt

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