Determinants of the Demand for Money in CEE Countries: Updated Evidence

Abstract

This article empirically models the relationship between the demand for money and a set of determinants, using the autoregressive distributed lag (ARDL) bounds-testing approach proposed by Pesaran, Shin, and Smith. We test this relationship in a country-specific framework of six Central and East European countries (Bulgaria, Croatia, Czech Republic, Hungary, Poland, and Romania) over the past twenty years. The results confirm the existence of a long-term cointegration relationship between the demand for money and its determinants, except in Bulgaria and Croatia. We identified a significant currency substitution effect in Bulgaria, Croatia, and Hungary, whereas in the Czech Republic, the wealth effect is stronger.

Keywords:

• ARDL bounds-testing approach
• CEE countries
• demand for money

JEL Classification:

• E410
• E520

ACKNOWLEDGMENT

Useful comments offered by participants in the INFER Workshop “Rethinking Development and Macroeconomic Policy,” Cluj-Napoca, Romania, April 2017, and the INFER Annual Conference, Bordeaux, France, June 2017, and anonymous referees are gratefully acknowledged.

Notes

1. Tables with results of the unit-root tests are available from the authors upon request.

2. Due to the large volume of estimations, short-term coefficients are not reported in the article, but results are available from the authors upon request.