The motives for currency demand in Malta

Abstract

This dissertation presents a brief review of the underlying motives for currency demand in Malta. It emerges that Malta has a very high ratio of currency demand to monetary assets (C/M2). The paper attempts to identify the major variables that influence this ratio via the use of regression analysis, for the time-period 1995 till 2006. The results indicate that tax rates affect currency demand and this is associated with non- or under-declaration of income. Malta's accession to the EU also influences currency demand, presumably because of improved financial intermediation and the prospect of the euro changeover. Malta's C/M2 ratio is also compared to the C/M2 ratio of other DU member states. Regression analysis is also used to establish what factors influence currency demand across Europe, again leading to the conclusion that tax rates have a negative effect on currency demand while GDP/capita is associated with lower ratios of currency demand. This result is possibly explained by the possibility that in more developed countries there exits better monetary intermediation and tax compliance measures. Malta's C/M2 ratio is also assessed on a global perspective, using a sample size of 175 countries. The results indicate that Malta has a very high C/M2 ratio when compared to other countries. The ratio is assessed with respect to population size, as a proxy for country size, and per capita income, as a proxy for the stage of economic development. The year 2005 is used for the analysis. The results indicate that richer countries tend to have lower C/M2 ratios, suggesting that currency demand decreases as countries develop. Malta, with its relatively high GDP/capita is somewhat of an outlier. This could be explained by the possibility that currency demand in Malta is to a large extend for tax evasion purposes.