Validity of Laidler Hypothesis: Evidence from Selected High Income Countries

Abstract

This study investigates the validity of the Laidler (1985) hypothesis, a long-forgotten issue. The study is based on 34 countries with various model specifications, updated data and vogue econometric techniques. Countries and data period (2000-2021) are selected based on data availability. Panel data techniques is applied and the analysis is based on inequality of income distribution. The obtained results show that the Laidler hypothesis on money demand is valid. More precisely, the results indicate that inequality of income distribution decreases money demand, and the impact of this variable is higher than two traditional variables: interest rate and income levels. The implication of this result is that central banks around the world should take into account the degree of income distribution inequality, in addition to income and interest rate, in the money demand function during projection, estimation, and forecasting of money demand of an economy. Otherwise, monetary policy may not achieve its desired targets. Further, as the data used in the study are picked from OECD economies it can be assumed that the implication of this research is ubiquitous across the globe. The paper is original in the sense that it is the first of its nature in the contemporary literature.

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