The Interplay of Economic Openness and Money Demand Function: Evidence from Selected Developing Countries

This paper investigates the impact of economic openness on demand for money across 24 developing countries from 1990 to 2022. Employing a dynamic panel framework, the research integrates measures of trade and financial openness, as quantified by the KOF Globalization Index, alongside essential macroeconomic variables such as real GDP per capita, real interest rates, and financial development. To address econometric issues like heteroskedasticity and cross-sectional dependence, the analysis employs Driscoll-Kraay(DK) and Panel-Corrected Standard Errors (PCSE) techniques. The findings indicate a significant negative correlation between openness and real money demand, suggesting that increased global integration diminishes reliance on domestic monetary assets by facilitating access to foreign financial instruments and alternatives. Additionally, the influence of financial development intensifies over time, while the effects of income and interest rates display temporal variations, particularly after 2000. Structural break analysis reveals notable regime shifts aligned with global economic events. These results have critical implications for monetary policy in developing economies, underscoring the need for adaptive strategies that account for the evolving interplay between globalization and monetary dynamics. JEL Code: E4, E5, E6, G1.