Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 31821
Evidence of the Long-run Equilibrium between Money Demand Determinants in Croatia

Authors: B. Skrabic, N. Tomic-Plazibat


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.

Keywords: Cointegration, Long-run equilibrium, Money demand function, Vector error correction model.

Digital Object Identifier (DOI):

Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 1825


[1] Z. Anusic, "The Determinants of Money Demand in Croatia and Simulation of the Post-Stabilization Period", Croatian Economic Survey, No. 2, 1994, pp. 85-120.
[2] Z. Anusic, "Dometi ortodoksne i heterodoksne stabilizacijske politike u obaranju inflacije u Hrvatskoj" Economic Trends and Economic Policy, No. 23, 1993, pp. 21-44.
[3] A. Beyer, "Modelling money demand in Germany", Journal of Applied Econometrics, Vol. 13, 1998, pp. 57-76.
[4] I. Pelipas, "Money demand and inflation in Belarus: Evidence from cointegrated VAR", Research in International Business and Finance, Vol. 20, 2006, pp. 200-214.
[5] J. Marcucci, and M Quagliariello, "Is bankportfolio riskiness procyclical? Evidence from Italy using a vector autoregression", International Financial Markets, Institutions & Money, Vol. 18, 2008, pp. 46-63.
[6] A. Babić, "The monthly Transaction Money Demand in Croatia", Working paper, Croatian National Bank, 2000, pp. 1-46.
[7] N. Erjavec, and B. Cota, "Macroeconomic Granger causal dynamics in Croatia: Evidence based on vector error-correction modeling analysis", Economic Review, Vol .54, No. 1-2, 2003, pp. 139-156.
[8] W. Enders, Applied Econometric Time Series (second edition), Wiley & Sons, 2004.
[9] W. D. McMillin, "Monetary policy and bank portfolios", Journal of Economics and Business, Vol. 48, 1996, pp. 315-335.
[10] V. Sonje, "Esej o monetarnim eksperimentima, ili: kako izabrati monetarni rezim u kasnoj fazi tranzicije", Economic Trends and Economic Policy, Vol. 9, No. 74, 1999, pp. 41-72.
[11] S. Johansen, "Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models", Econometrica, Vol. 59, No. 6, 1991, pp. 1551-1580.