Money Demand in Romania

Dumitru, Ionut (2002): Money Demand in Romania. Published in: (15 June 2002)

Abstract

Finding a stable money demand relationship is considered essential for the formulation and conduction of an efficient monetary policy. Consequently, numerous theoretical and empirical studies have been conducted in both developed and developing countries to evaluate the determinants and the stability of the demand for money function for various monetary aggregates. This paper briefly reviews the theoretical work, tracing the contributions of several researchers beginning from the classical economists, and explains relevant empirical issues in modelling and estimating money demand function for Romania. The paper models the empirical relationship between broader definition of money, output, interest rates, inflation and exchange rate in Romania and examines the constancy of this relationship, especially in the light of financial reform and deregulation of financial markets. The demand for broad money in Romania has been stable between 1996 and 2002 despite of a pronounced financial liberalization. The analysis suggests that, in Romania in the long run the inflation is weakly exogenous for the money demand, which means that inflation is not a monetary phenomenon.

• Item Type: MPRA Paper
• Language: English
• Keywords: money demand, cointegration, monetary targeting
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money

References

1) Arestis Ph., (1988), “The Demand for Money in Small Developing Economies: An Application of the Error Correction Mechanism” In: Ph. Arestis (ed.): ”Contemporary Issues in Money and Banking. Chaltenham, Edward Elgar

2) Arlt, J., M. Guba, S. Radkovsky, M. Sojka, V. Stiller, (2001), “Influence of selected factors on the the demand for money 1994-2000”, Czech National Bank Working Paper No. 30, Praha

3) Ball, L. (2001), “Another Look at Long-Run Money Demand”, Journal of Monetary Economics, 47, 1, pp. 31-44.

4) Bomhoff, E. (1991), “Stability and Velocity in the Major Industrial Countries: A Kalman Filter Approach”, IMF Staff Papers, 38, 3, pp. 626-642.

5) Brand, C. and N. Cassola (2000), “A Money Demand System for Euro Area M3”, ECB Working Paper Series n. 39.

6) Budina, N. and S. van Wijnbergen (1998), "Fiscal Deficits, Monetary Reform and Inflation Stabilization in Romania", World Bank, Development Research Group

7) Chadha, J. S., Haldane, A. G. and N. G. J. Janssen (1998), “Shoe-Leather Costs Reconsidered”, Economic Journal, 108, 447, pp. 363-382.

8) Charemza, W., D., "New Directions in Econometric Practice: General to Specific Modeling, Cointegration and Vector Autoregression", E. Elgar Publishing Ltd. 1992.

9) Coenen, G. and J. L. Vega (1999),”The Demand for M3 in the Euro Area”, ECB Working Paper n. 6.

10) Cuthbertson, K., D. Bredin, (2001), “Money demand in Czech Republic since transition”, Journal of Policy Reform

11) Dickey, D. A. and Rossana, R. J. (1994), “Cointegrated time series: A guide to estimation and hypothesis testing”, Oxford Bulletin of Economic and Statistics, 56 (3), 325-53.

12) Egoume-Bosogo, P., (2000), “Money demand in Guyana”, IMF Working Paper No. 119

13) Enders, W., (2000), “Applied econometric time series”, Iowa State University, John Wiley & Sons, Inc

14) Engle R. F., Granger C. W. J. (1987) – “Cointegration and Error Correction: Representation, Estimation and Testing”, Econometrica, 55

15) Ericsson, N. R. (1998), “Empirical Modeling of Money Demand”, Empirical Economics, 23, 3, pp. 295-315.

16) Ericsson, N. R., D. F. Hendry, K. M. Prestwich, (1998), “Friedman and Schwartz (1982) resisted: Assessing annual and phase-average models of money demand in the United Kingdom”, Empirical Economics 23: 401-415

17) Ericsson, N.R. (1999), “Empirical modeling of money demand”, in H. Lütkepohl and J. Wolters (eds.), Money Demand in Europe, (Physica-Verlag) Heidelberg, 29-49.

18) Ericsson, N.R., D.F Hendry and G.E. Mizon (1998), “Exogeneity, cointegration and economic policy analysis”, Journal of Business and Economic Statistics, 16, 370-387.

19) Favero, A. C., (2001), “Applied macro econometrics”, Oxford University Press

20) Greene, W. (1993), “Econometric Analysis”, second edition, Macmillan Publishing Company, New York, N.Y.

21) Hamilton, D. J., (1994), “Time series analysis”, Princeton University Press

22) Hendry, F. D., and K. Juselius (2000), “Explaining Cointegration Analysis: Part II”, Energy Journal 21

23) Johansen S., Juselius K., (1990), “Maximum Likelihood Estimation and Inference on Cointegration - with Applications to Simultaneous Equations and Cointegration”, Journal of Econometrics, 69

24) Judd, J.P., and J.L. Scadding, (1982), “The Search for a Stable Money Demand Function: A survey of the post-1973 literature,” Journal of Economic Literature, Vol. 20, No. 3, pp. 993-1023

25) Jusoh, M. (1987), „Inflationary Expectations and the Demand for Money in moderate inflation: Malayesian evidence”, Journal Ekonomi Malayesia, Vol. 15, pp. 3-14.

26) Lucas, R. (2000), “Inflation and Welfare”, Econometrica, 68, 2, pp. 247-274.

27) Lütkepohl, H. and H.-E. Reimers (1992), “Impulse response analysis of cointegrated systems”, Journal of Economics Dynamics and Control, 16, 53-78.

28) Lütkepohl, H., Teräsvirta, T. and J. Wolters (1999) – “Investigating Stability and Linearity of a German M1 Demand Function”, Journal of Applied Econometrics, 14, pp. 511-525.

29) Mullighan, C. and X. Sala-i-Martin (1996), "Adoption of Financial Technologies: Technologies and Implications for Money Demand and Monetary Policy", NBER Working Paper n. 5504.

30) Özmen, E (1998), "Is Currency Seignorage Exogenous for Inflation Tax in Turkey?", Applied Economics, 30, 545 – 552

31) Patterson, K., (2000), “An introduction to applied econometrics: a time series approach”, Palgrave

32) Petursson, T., (2001), “The representative household’s demand for money in a cointegrated VAR model”, Central Bank of Iceland, Working Paper No. 12

33) Sidrauski, M. (1967), "Rational Choice and Patterns of Growth in a Monetary Economy", American Economic Review, 57, pp. 534-544.

34) Simmons, R. (1992), “An error-correction approach to demand for money in five African developing countries”, Journal of Economic Studies, Vol 19, pp. 29-47

35) Soto, R., M. Tapia, (2001), “Seasonal cointegration and the stability of the demand for money”, Central Bank of Chile, Working Paper No. 103

36) Sriram S. S. (1999a), “Survey of Literature on Demand for Money: Theoretical and Empirical Work with Special Reference to Error-Correction Models”, IMF Working Paper No. 64, Washington

37) Sriram S. S. (1999b), “Demand for M2 in an Emerging-Market Economy: An error-correction Model for Malaysia”, IMF Working Paper No. 173, Washington

38) Stracca, L., (2001), “The functional form of the demand for euro area M1”, ECB Working Paper 51

39) Van Aarle, B. and Budina, N., (1996), “Currency Substitution and Seignorage in Eastern Europe”, The Journal of Policy Reform, Vol. 1, pp. 279-98.

40) Walsh, C. E., (1998), "Monetary Policy and Theory", MIT Press, Cambridge

41) *** "Romania: Selected Issues and Statistical Appendix", IMF, 2001

42) *** International Monetary Fund, (2001) „IMF Country Report No. 01/204 - Romania: Request for a Stand-By Arrangement”, November

43) *** International Monetary Fund, (2001) „IMF Country Report No. 16/01 - Romania: Selected Issues and Statistical Appendix”, January

44) *** National Bank of Romania, “Monthly bulletin” from period 1996-2002, Bucharest, Romania

45) *** National Bank of Romania, “Annual Report” from period 1997-2002, Bucharest, Romania