Money Demand in an EU Accession Country: A VECM Study of Croatia

Abstract

The paper estimates the money demand in Croatia using monthly data from 1994 to 2002. A failure of the Fisher equation is found, and adjustment to the standard money-demand function is made to include the inflation rate as well as the nominal interest rate. In a two-equation cointegrated system, a stable money demand shows rapid convergence back to equilibrium after shocks. This function performs better than an alternative using the exchange rate instead of the inflation rate as in the 'pass-through' literature on exchange rates. The results provide a basis for inflation rate forecasting and suggest the ability to use inflation targeting goals in transition countries during the EU accession process. Finding a stable money demand also limits the scope for central bank 'inflation bias'.

Money-in-the-Utility-Function: Model Simulations and Money Demand Estimation in the Case of the Republic of Macedonia

“…In this stage, a properly specified money demand function is of critical importance for the validity of the estimation process. In specifying the money demand function, we follow the approach developed by Cziráky and Gillman (2006). Following Cziráky and Gillman (2006), we test whether the Fisher equation holds in the case of the Republic of Macedonia.…”

“…In specifying the money demand function, we follow the approach developed by Cziráky and Gillman (2006). Following Cziráky and Gillman (2006), we test whether the Fisher equation holds in the case of the Republic of Macedonia. If the Fisher relation holds, the inflation rate is already included in the money demand equation through the interest rates.…”

“…Slavova (2003) analyzed the demand for money in Bulgaria for the period of hyperinflation and for the period of macroeconomic stabilization. The empirical research on the demand for money in Croatia includes Babic (2000), Payne (2003), Cziráky and Gillman (2006) and Skrabic and Tomic-Plazibat (2009). The procedure for estimating demand for money in Macedonia used in this paper will be similar to the procedure developed by Cziráky and Gillman (2006).…”

“…However, this may not be the case with Macedonia, given the fact that the financial market is still underdeveloped and the capital mobility is limited. In order to address this issue, we followed the approach developed by Cziráky and Gillman (2006). First, we test whether the Fisher relationship holds in the case of Macedonia.…”

The Stability of Long-Run Money Demand in Western Balkan Countries: An Empirical Panel Investigation

“…According to Cziraky and Gillman (2006), a stable money demand allows for better predictions of monetary policy effects on interest rates, output, and inflation, and reduces the possibility of an inflation bias.…”