Evidence of the Long-run Equilibrium between Money Demand Determinants in Croatia

In this paper real money demand function is analyzed within multivariate time-series framework. Cointegration approach is used (Johansen procedure) assuming interdependence between money demand determinants, which are nonstationary variables. This will help us to understand the behavior of money demand in Croatia, revealing the significant influence between endogenous variables in vector autoregrression system (VAR), i.e. vector error correction model (VECM). Exogeneity of the explanatory variables is tested. Long-run money demand function is estimated indicating slow speed of adjustment of removing the disequilibrium. Empirical results provide the evidence that real industrial production and exchange rate explains the most variations of money demand in the long-run, while interest rate is significant only in short-run.

Authors:

• B. Skrabic
• N. Tomic-Plazibat

Keywords:

• Cointegration
• Long-run equilibrium
• Money demand function
• Vector error correction model.

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