The relationship between budget deficits and money demand: evidence from a small economy
A considerable number of empirical studies exploring the links between budget deficits and the demand for money have led to mixed results. By using annual data of the Greek economy and previous empirical studies, this paper empirically evaluates the sensitivity and validity of the Keynesian proposition and the Ricardian equivalence hypothesis. The paper employs cointegration, ECM methodology, and several diagnostic and specification tests. The empirical findings show a significant and positive relationship between budget deficits and the demand for money, supporting the Keynesian model.