Economic Sentiments and Money Demand Stability in the CEECs

Abstract

This paper aims at building a money demand function that takes account of the heterogeneities of the Central and Eastern European Countries (CEECs) in the context of the European integration. We extend the traditional specification of money demand to capture the effects of a change in agents' expectations regarding the dynamics of economic activity. The traditional determinants of the demand for money (real GDP, interest rate, inflation rate) are found to be significant and have the expected sign. Above this, we also find that the role of economic sentiments-captured through the European sentiment indicator (ESI)-is significant in explaining the money demand: consumers' and investors' gloomy expectations concerning future economic developments trigger an increase in the domestic money demand, due to precautionary reasons. Our results also suggest that a currency substitution effect, against both euro and USD, is present in the CEECs.

The Effect of Policy Uncertainty on Money Demand in CEMAC Countries

“…Our results regarding the positive effects of real income on money demand suggest that people hold more money in the long-run as the level of income increases in CEMAC. These outcomes are in line with Abkar (2023) for Pakistan, Bahmani-Oskooee and Arize (2020) for some African countries including Cameroon, Mera et al (2020) for the Central and Eastern European Countries (CEECs). The significant long-term negative effects of the inflation rate indicate that the opportunity cost of holding money only passes-through the inflation level in the CEMAC area.…”

“…Some recent contributions also use panel data approaches to explain the link between money demand and uncertainty. For example, Mera et al (2020) study the relationship between money demand and its determinants for eight Central and Eastern European Countries (CEEEs) between 2008Q1 and 2017Q1 using panel data methods that account for both endogeneity and common shocks. They find that perceived uncertainty, as reflected by the economic sentiment indicator, has a significant impact on money demand.…”

“…Furthermore, the literature is rich in other relevant contributions that have estimated the effect of uncertainty on the demand for money. To just mention few, we have, Hall and Noble (1987), Bahmani-Oskooee et al, (2012), Bahmani-Oskooee et al, (2013, Özdemir and Saygılı (2013), Bahmani-Oskooee and Kones (2014), , Bahmani-Oskooee et al, (2016), Bahmani-Oskooee andMaki-Nayeri (2018a,b,c;2020a, b), Gan (2019), Bahmani-Oskooee and Arize (2020), Hossain and Arwatchanakarn (2020), Mera et al, (2020), Ongan and Gocer (2021), Murad et al, (2021), andAkbar (2023).…”

The demand for money and the real exchange rate misalignments in emerging European countries: A nonlinear approach

“…(2017), Mera et al. (2019), Ivanovski and Churchill (2019), Dreger et al. (2019), and Benchimol and Quereshi (2020).…”

“…They also argue that literature on the demand for money might benefit from an emerging trend toward an increased use of cross-section data in empirical studies. Since this conclusion, there has been growing interest in the money demand equations, mainly empirically, to see whether monetary aggregates have a central role to play in a complete analysis of macroeconomic implications of monetary policy, see Kumar (2014), Daniele et al (2017), , Mera et al (2019), Ivanovski and Churchill (2019), Dreger et al (2019), and Benchimol and Quereshi (2020).…”