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Money Demand in an EU Accession Country: A VECM Study of Croatia
Author(s) -
Cziráky Dario,
Gillman Max
Publication year - 2006
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.0307-3378.2006.00237.x
Subject(s) - economics , inflation (cosmology) , demand for money , demand curve , exchange rate , accession , monetary economics , convergence (economics) , fisher hypothesis , interest rate , monetary policy , econometrics , scope (computer science) , macroeconomics , real interest rate , international economics , microeconomics , european union , programming language , physics , theoretical physics , computer science
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’.