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Money Demand in an EU Accession Country: A VECM Study of Croatia

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  • Dario Cziráky
  • Max Gillman

Abstract

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'. Copyright Blackwell Publishers Ltd and the Board of Trustees of the Bulletin of Economic Research, 2006.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 58 (2006)
Issue (Month): 2 (04)
Pages: 105-127

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Handle: RePEc:bla:buecrs:v:58:y:2006:i:2:p:105-127

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Cited by:
  1. Gillman, Max & Harris, Mark N., 2008. "The Effect of Inflation on Growth: Evidence from a Panel of Transition Countries," Cardiff Economics Working Papers E2008/25, Cardiff University, Cardiff Business School, Economics Section.
  2. NGUYEN Huyen Diu & Wade D. Pfau, 2010. "The Determinants and Stability of Real Money Demand in Vietnam, 1999-2009," GRIPS Discussion Papers 10-14, National Graduate Institute for Policy Studies.
  3. Max Gillman & Mark N Harris & Michal Kejak, 2007. "The Interaction of Inflation and Financial Development with Endogenous Growth," Money Macro and Finance (MMF) Research Group Conference 2006 29, Money Macro and Finance Research Group.

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