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Money Demand and Inflation in Dollarized Economies

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  • Franziska Ohnsorge
  • Nienke Oomes

Abstract

Money demand in dollarized economies often appears to be highly unstable, making it difficult to forecast and control inflation. In this paper, we show that a stable money demand function for Russia can be found for "effective broad money," which includes an estimate of foreign cash holdings. Moreover, we find that an excess supply of effective broad money is inflationary, while other excess money measures are not, and that effective broad money growth has the strongest and most persistent effect on short-run inflation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/144.

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Length: 30
Date of creation: 01 Jul 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/144

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Related research

Keywords: Dollarization; Currency substitution; inflation; money demand; foreign currency; money growth; money supply; monetary aggregates; monetary policy; monetary fund; monetary aggregate; inflation equation; inflation dynamics; inflation rate; central bank; demand for money; monetary theory; foreign exchange; money market; quantity theory of money; inflationary pressures; monetary phenomenon; acceleration in inflation; money balances; price level; change in inflation; rational expectations; real money; monetary policy decision; dollar value; effect of inflation; monetary instrument; monetary policy transmission mechanisms; monetary theories; price inflation; theory of money; monetary policies; lower inflation; expansionary monetary policies; quantity theory; forecasting inflation; domestic money supply;

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References

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  1. Bogdan Lissovolik, 2003. "Determinants of Inflation in a Transition Economy," IMF Working Papers 03/126, International Monetary Fund.
  2. Bahmani-Oskooee Mohsen & Shin Sungwon, 2002. "Stability of the Demand for Money in Korea," International Economic Journal, Taylor & Francis Journals, vol. 16(2), pages 85-95.
  3. Kamin, Steven B. & Ericsson, Neil R., 2003. "Dollarization in post-hyperinflationary Argentina," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 185-211, April.
  4. Taylor, Mark P, 1990. "The Hyperinflation Model of Money Demand Revisited," CEPR Discussion Papers 473, C.E.P.R. Discussion Papers.
  5. Toshitaka Sekine, 2001. "Modeling and Forecasting Inflation in Japan," IMF Working Papers 01/82, International Monetary Fund.
  6. Joannes Mongardini & Johannes Mueller, 2000. "Ratchet Effects in Currency Substitution: An Application to the Kyrgyz Republic," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 3.
  7. Nienke Oomes, 2003. "Network Externalities and Dollarization Hysteresis," IMF Working Papers 03/96, International Monetary Fund.
  8. Mangal Goswami & Oya Celasun, 2002. "An Analysis of Money Demand and Inflation in the Islamic Republic of Iran," IMF Working Papers 02/205, International Monetary Fund.
  9. Oral Williams & Olumuyiwa Adedeji, 2004. "Inflation Dynamics in the Dominican Republic," IMF Working Papers 04/29, International Monetary Fund.
  10. Choudhry, T., 1998. "Another visit to the Cagan model of money demand: the latest Russian experience," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 355-376, April.
  11. de Brouwer, Gordon & Ericsson, Neil R, 1998. "Modeling Inflation in Australia," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 433-49, October.
  12. Mohsen Bahmani-Oskooee & Michael P. Barry, 2000. "Stability of the Demand for Money in an Unstable Country: Russia," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(4), pages 619-629, July.
  13. International Monetary Fund, 2002. "Russian Federation," IMF Staff Country Reports 02/75, International Monetary Fund.
  14. Nikolic, Milan, 2000. "Money Growth-Inflation Relationship in Postcommunist Russia," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 108-133, March.
  15. Case M. Sprenkle, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-184, Fall.
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