Money Demand Features in CEE Countries

Abstract

IntroductionMoney demand is an important topic for economic policymakers, as their aim is to select the monetary policy instruments that are most suitable for an efficient monetary policy. In order to use monetary aggregates as an in- strument for the conduct of monetary policy, a stable and predictable relationship between money demand and its determinants is required [1]. The capability of understanding monetary developments can make the difference between an efficient monetary policy and an uncertain future evolution of the macroeconomic variables. For testing the stability of the relationship between money and the evolution of prices, money demand is linked to other macroeconomic variables such as: income or interest rates.Macroeconomic stability is one of the main goals of monetary authorities, as they direct their effort towards a global objective of economic growth and development. The complexity of the economy seen at a national or interregional level, brings a number of chal- lenges for policymakers in order to specify a model for money demand which best fits each individual economy. Therefore, a high number of factors should be taken into consideration, be they macroeconomic variables or country-specific characteristics.In this context, the evolution of the monetary aggregates in transition economies takes on a new meaning, as their economies experienced structural changes over time. Features like the persistence of some structural shocks or the lack of strong institutional framework may be responsible for unforeseen fluctuations in the evolution of the monetary aggregates. Among the main causes that can make the development of the monetary aggregates different from advanced economies are [2, pp. 4-5]: financial underdevelopment, poor fiscal management, the lack of independence of the monetary authority or the predisposition of being more receptive to foreign shocks. Therefore we try to assess the impact of each determinant of money demand, by integrating this evolution in the context of the stylized facts that characterize their economy. The main question that supports this analysis is which dimension of the demand for money has the main impact, so if the liquidity or the risk associated is the driven factor of its evolution.The aim of this paper is to make a preliminary analysis of the variables that influence the demand for money in Central and Eastern Euro- pean (CEE) countries. We choose to include in our sample only countries that are members of the European Union (since 2004: Czech Republic, Hungary, Poland and since 2007: Bulgaria and Romania), but have not already adopted the single currency. The selection of countries is also dictated by data availability, as countries like Slovak Republic or Slovenia entered into the euro area in January 2009 and, respectively January 2007, and therefore information about the demand for money in their local currency is not available anymore. The remaining of the paper is organised as follows. In Section 2 are presented some studies that have approached the topic of money demand in Central and Eastern European countries and it is formulated the theoretical framework of the money demand specification. In sections 3 and 4 it is made a detailed description of the variables used in the traditional money demand functions, with special focus on the specific features of CEE countries' development. Concluding remarks are presented in section 5.2 Literature Review on Money Demand in CEE countriesIn spite of the existence of an extensive literature on money demand and its determinants, from an empirical point of view, there are still countries that remain uncovered in terms of long run money demand modelling. The reason is sometimes dictated by data availability, as it is the case of the countries from CEE, because in the majority of these economies, data on monetary aggregates become available only few years after 1990. The different development pace and also the differences in monetary policy implementation makes difficult the attempt to treat these countries as a group. …