Modelling money demand for a panel of eight transitional economies

Abstract

In this article, we estimate money demand functions for a panel of eight transitional economies, using quarterly data for the period 1995:01 1995 to 2005:03. We find that real M1 and real M2 and their determinants, namely real income and short-term domestic interest rate, are cointegrated, both for individual countries as well as for the panel. Long-run elasticities suggest that consistent with theory, real income positively and nominal interest rate negatively impact real money demand. Our test for panel Granger causality suggests short-run bidirectional causality between M1 and M2 and their determinants. Finally, our tests for stability of the money demand functions reveal more cases of unstable money demand functions when M2 is used as a proxy for money demand.

Notes

¹ Many of the transitional economies if not currently using money as their monetary policy target have at some point used either M1 or M2 (see, for example, Esanov et al. (2005) for a case of Russia).