Back Matter

APPENDIX I

Appendix 1: Data Sources and Definitions of Variables

m2: currency in circulation plus sight, saving, and time deposits. Source: Bank of Guyana (BOG), Statistical Bulletin.

rm2: m2 deflated by CPI.

p: consumer price index. Source: Bureau of Statistics (BOS), Ministry of Finance, Guyana.

y: Index of real economic activity calculated as a composite index of production for the five main sectors (bauxite, gold, rice, sugar, timber) representing about half the GDP using the production data supplied by BOS. A Laspeyres-type index and a Paasche-type index were created. As they are almost perfectly correlated, using one or the other does not change results. The Laspeyres-type index was used in this study. Source: the author.

e: End of period (month) nominal exchange rate of the Guyana dollar vis a vis the US dollar. Source: Internation Financial Statistics (IFS), IMF.

idn: Interest rate (average for the month) on three-month deposits at commercial banks, net of the 15 percent withholding established in January 1991. Source: Internation Financial Statistics (IFS), IMF.

itn:. Average tender rate (for the month) for three-month Treasury Bills net of the 15 percent withholding tax that became effective on March 1 st 1995. Source: Internation Financial Statistics (IFS), IMF.

itUS: Three-month US Treasury bill discount rate. Source: Internation Financial Statistics (IFS), IMF.

APPENDIX II

Structural Reforms in the Financial Sector, and Exchange and Trade Regimes During the 1990s

Guyana: Selected Financial Reform Measures

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Guyana: Selected Structural Reforms in the Exchange System, 1987–96

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Guyana: Selected Structural Reforms in the Trade System, 1988–99

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APPENDIX III

VAR Excluding Nominal Exchange Rate

As the coefficient of the nominal exchange rate in the restricted VAR presented in table 3 is not significant, this appendix discusses the estimates of a VAR of the system identified excluding the NER. The results in Table 5 show that excluding the nominal exchange rate yields two cointegrating vectors. The first CIV can be interpreted as a long-run relationship for real money demand. Real income and the three interest rates have the expected signs (a Chi-square test accepts the restriction that the coefficients of the interest rates on three-month deposit and on three-month Treasury bills are equal with opposite signs). However, the real income elasticity is lower than one, as in the VAR including the NER. As previously, that elasticity is successfully restricted to unity. The second CIV is not obvious. It could represent a long-run relationship between domestic interest rates. Indeed, commercial banks are the main suscribers for three-month interest Treasury bills. Given that the latter are of the same maturity as three-month deposits, commercial banks would seek to match the cost of the resources raised with the return on their investments. Alternatively, the second cointegration vector could be a long-run real income relationship.

Table 5:

Cointegration Analysis of Money Demand

(Model Excluding Nominal Exchange Rate)

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Notes toTable 51/ The vector autoregression includes three lags on each variable (rm2,y, idn, itn, itUS, e), a constant term, a restricted trend, seasonal dummies (Mt-1,...., Mt-11), the two devaluation dummies dev1 and dev2, a dummy to capture the liberalization of interest rates (dumIR), and a dummy to capture the frequency of Treasury bills auctions (dumTB). The estimation period is 1990 (5)-1999 (9).2/ The statistics λmax and λtrace are Johansen’s maximum eigenvalue and trace eigenvalues statistics for testing for cointegration, adjusted for degrees of freedom. The null hypothesis is in relation to the cointegration rank r. Rejection of r = 0 is evidence in favor of at least one cointegrating vector.

To sort this out, the coefficients on the endogenous variables (on the two CIVs identified) are restricted with alternative models in mind. For the first CIV, the restriction imposes a unit elasticity of real income. As for the second CIV, the restriction that dominates (with the largest margin of acceptance of the Chi-square test) is the one that allows to regard that CIV as a real income long-run relationship. One possible interpretation of that relationship is that as real income increases agents reduce their holdings of money (negative coefficients of the interest rate on deposits) and acquire more alternative financial assets (which have positive coefficients), both domestic and foreign. This is consistent with the fact that, as income increases individuals are likely to accept riskier and/or less liquid assets in exchange for higher return. 24 The larger coefficient on the U.S. Treasury bills discount rate as opposed to the interest rate on Guyanese Treasury bills, in the face of a positive spread between the domestic and U.S. returns, suggests that agents attach a higher risk premium to Guyanese securities and therefore prefer a lower but less risky return on U.S. securities.

APPENDIX IV

Cointegration Analysis of the Closed and Open-Economy Versions of Money Demand

Variables:

LrealM2BOG = rm2

LindRA1 =y

Ndeprate = idn

NetTBrate = itn

USTBrate = itUS

Anlnf = Δp

AGEpNER =Δe

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References

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1

I would like to thank Gunnar Jonsson, Lamin Leigh, Mario Mesquita, Anthony Pellechio, Nadal-De Simone, Athanasios Vamvakidis, Ethan Weisman, and Gopal Yadav for discussions and comments on a previous draft of this paper. Assistance from Alfred Go and Patricia Parsons is also acknowledged. The usual disclaimer applies.

2

These include food staples (sugar, rice, and shrimps) and mining products (bauxite, gold, and diamonds). Guyana also exports forestry products (logs and semi-transformed wood products). The world prices for these commodities are prone to wide fluctuations. Another source of foreign exchange are remittances by the large Guyanese community leaving in Europe and North America, but there are no reliable estimates of these.

3

The constitution called for a socialist paradigm based on “cooperative efforts” and “economic law of socialism”

4

The reserve requirement was lowered in January 2000 from an average of 15 percent to 12 percent in keeping with the drive for further liberalization.

5

There is a strong demand for 3-month treasury bills as, among the government securities, they are the only ones that qualify as liquid assets towards meeting the liquid assets requirement. Interest rates on this instrument would probably be higher otherwise.

6

For a broad review of the literature on money demand see Sriram (1999a).

7

On average, quasi money accounts for 75 percent of M2 and deposit of maturity up to three months account for more than 80 percent of quasi money. The deposit rate is adjusted beginning in January 1991 to reflect the 15 percent withholding tax (WT) that was imposed then on interest earnings. The net deposit rate (idn) equal id from January 1990 to December 1990, and id*(1-WT) from January 1991 to September 1999.

8

This interest rate also was adjusted beginning in March 1st, 1995 when the withholding tax was extended to cover interest earnings on government securities. Therefore, the adjusted interest rate on three-month treasury bills (tin) equals it from January 1990 to February 1995, and it*(1-WT) from March 1995 to September 1999.

9

A direct measure of currency substitution is not available as there is no data compiled on the amount of foreign exchange available in the economy outside the banking system. A relatively large number of Guyanese nationals leave abroad (allegedly more than the 650 thousands leaving in Guyana) suggesting that remittances may be relatively substantial.

10

A similar variable was constructed using the nominal effective exchange rate (NEER) compiled by the IFS. In this case, increases represent an appreciation of the Guyana dollar vis a vis the US dollar, implying a positive relation with the demand for the Guyana dollar. However, the nominal exchange rate was preferred for the estimations because it better captures anticipations.

11

The dynamic nature of financal liberalization may call for a dynamic dummy process (Baba, Hendry, an Starr, 1992). However, the need to neutralize large outliers justifies the use of discrete dummies.

12

All variable except interest rates are in logarithms (lower case letters). This log-linear form allows to interpret coefficients of variables in logarithms as elasticities (percentage change leading to a one percent change in the modeled variable), and coefficients of interest rates as semi-elasticities (change in level leading to a one percent change in the modeled variable).

13

Although there are 117 observations, one should note that a ten-year period is somewhat short for estimating a long run relationship (Section III.B. explains why this period could not be extended). The analysis proceeds with that caveat in mind.

14

The order of integration (i) indicates the number of times a variable should be differenced to make it stationary.

15

The regressions for testing the existence of units roots do not include the dummies created to capture these events.

16

The Johansen’ s procedure is sensitive to the number of lags included in the VAR. The high frequency of the data (monthly) amplifies the importance of this issue. Given the number of degrees of freedom required, the number of observations (117) allows to include a maximum of only four lags. An F-test of the 4th lag, generally is not significant and the elimination of the third lag is ruled out. Sriram (1999b) used the same frequency data in his study of money demand in Malaysia and also found that the inclusion of three lags was sufficient.

17

The non-significance of that restriction is not strong enough to rule out a unit income elasticity. Assuming it actually holds, the CIV would be the following (standard deviations in parenthesis):

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18

The long run income elasticity of money demand tends to be slightly higher than one in developing countries reflecting the small number of alternative assets (notably the shallowness of financial markets). There may be two (not necessarily mutually exclusive) reasons for the lower-than-unit elasticity of income. First, the income variable that was constructed reflects production in sectors that account for a little less than 50 percent of GDP. Thus, it might not be sufficiently representative. The second problem might be a mis specification of the model (by variable omission or inclusion).

19

The Chi-square test strongly supports that restriction (χ2(1) = 1.59 [0.2073]).

20

Although the coefficient of the NER in the restricted model is not at all significant, a test of the significance of the variable in the system rules out its exclusion at the 5 percent confidence level (an analysis of the VAR excluding the NER is provided in Appendix 3).

21

The existence of a cointegrating vector implies an error-correction representation. For a simple presentation see Ericsson (1994).

22

Right-hand side variables are expressed in terms of first differences, except for the error-correction term that remains in level. Therefore, two lags in this equation are equivalent to the three lags included in the vector autoregression.

23

There are a number of studies of money demand for countries that have experienced numerous reforms that have established stable money demand relations [Ericsson and Sharma (1996) on Greek data; G. Jonsson (1999) on South Africa’s data; Sriram (1999b) on Malaysian data, and Leigh (1997) on Kyrgyz data to name a few].

24

Whether Treasury bills, both Guyanese and foreign (U.S.), are riskier than term deposits in a Guyanese bank is debatable. However, clearly government securities are less liquid because governments can always impose a rollover justified by monetary policy objectives or simple default.