Abstract: This paper deals with theoretical and empirical analysis of money demand in the transition and euroised environment. Different theories of demand for money are briefly outlined leading to a conventional specification of money demand as a function of some scale variable and a set of opportunity cost variables. This finding serves as a basis for analysis of money demand in the transition environment which has some distinctive features as compared to developed economies, e.g. underdeveloped financial system, a (hyper)inflationary environment, currency substitution, etc. These specifics pose a question as to whether there is a need for a special theory of money demand in the transition environment. The literature does not seem to provide any particular theory regarding the latter. We offer a model of money demand which is based on the portfolio balance framework which, in addition to a scale variable and domestic interest rate, allows also for the impact of foreign variables such foreign interest rates and exchange rate. However, this model does not account for inflationary environment and we supplement it by allowing also inflation to be one of the determinants of demand for money. As we are interested in Croatia, we use this model as a starting point in our empirical estimations combining different co-integration techniques. The obtained findings point to absence of co-integration, which suggests there is no stable money demand function in Croatia.
Publication Year: 2007
Publication Date: 2007-01-01
Language: en
Type: article
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