The asymmetric impact of policy uncertainty on money demand in Viet Nam

Abstract

This study analyzes the asymmetric impact of policy uncertainty (measured by the World Uncertainty Index) on money demand in Vietnam during the period from the first quarter of 2000 to the fourth quarter of 2023 using the linear ARDL (ARDL) and nonlinear ARDL (NARDL) models. The results from the ARDL model show that in the short term, policy uncertainty reduces money demand, but this effect is insignificant in the long term. The NARDL estimation reveals that, in the short run, positive shocks to policy uncertainty exert a statistically significant expansionary effect on money demand, whereas negative shocks reduce money demand with an adjustment magnitude that is not symmetric to the positive response. In the long run, both positive and negative policy uncertainty shocks are associated with a contraction in money demand; however, the effect of positive shocks proves economically negligible. Additionally, real income, interest rates, and inflation rates are also considered as important factors affecting money demand. These empirical results provide a crucial foundation for policy recommendations to improve monetary policy efficacy and foster macroeconomic stability in Viet Nam.