Testing Endogeneity of Money Supply in Developing Countries using Panel VAR Method

This study examines the endogeneity of the money supply in 67 developing countries from 2001 to 2023. Countries are classified into three groups based on the World Bank’s income classification. Using a Panel Vector Autoregressive (PVAR) model and the Granger causality test, the relationships between price level, real GDP, broad money supply, bank loans, and the monetary base are analyzed. Impulse-Response Functions and Forecast-Error Variance Decomposition are used to assess dynamic effects. Findings indicate that the money supply is endogenous and expands through bank lending. The results support the Liquidity Preference view, providing key insights for the design of monetary policy in developing economies.