INFLATION AND THE DEMAND FOR MONEY IN DEVELOPING-COUNTRIES

The sensitivity of money holdings to yield is an important issue for f inancial sector reform. For low-income developing countries, this sens itivity has been judged mainly on the basis of demand studies which us e inflation as the opportunity cost of holding money. But researchers have generally neglected the fact that, because changes in prices may appear in dynamic demand for money equations even if the demand for mo ney is not yield sensitive, it is not normally possible to make valid inferences about the inflation sensitivity of equilibrium demand for m oney. The severity of the problem is illustrated by reference to Ghana and China.