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Long-Run Money Demand in the New EU Member States with Exchange Rate Effects

  • Christian Dreger
  • Hans-Eggert Reimers
  • Barbara Roffia

Within a wide range of other economic and financial indicators, money is highly relevant to the two-pillar monetary strategy of the European Central Bank for detecting risks to price stability over the medium term. Money demand models are a natural benchmark for assessing monetary developments. The existence of a well-specified and stable relation between money and prices can be perceived as a prerequisite for using monetary aggregates in the conduct of monetary policy, which is usually assessed within a money-demand framework. In this respect, the present analysis is important for the new member states of the European Union, as they are expected to join the euro area in future years. In this study, a money-demand analysis in the new member states is conducted using panel cointegration methods. A well-behaved long-run money demand relation can be identified only if the exchange rate is included as part of the opportunity cost. In the long-run cointegrating vector, income elasticity exceeds unity. Over the entire sample period, the exchange rate vis-Ã -vis the U.S. dollar turns out to be significant and a more appropriate variable in money demand than is the euro exchange rate.

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Article provided by M.E. Sharpe, Inc. in its journal Eastern European Economics.

Volume (Year): 45 (2007)
Issue (Month): 2 (April)
Pages: 75-94

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Handle: RePEc:mes:eaeuec:v:45:y:2007:i:2:p:75-94
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