Economic uncertainty and money demand stability in the CEECs

Abstract


This paper aims at building a money demand function that takes account of the heterogeneities of the Central and Eastern European Countries (CEECs) in the context of European integration. We extend the traditional specification of money demand to capture the role of economic uncertainty, using the European sentiment indicator. The traditional determinants of the demand for money (real GDP, interest rate, inflation rate) are found to be significant and have the expected sign. Above this, we also find that the role of economic sentiments impact significantly the money demand: a rise of the perceived uncertainty leads to an increase in money demand due to precautionary reasons. Our results also suggest that a currency substitution effect against both euro and USD is present in the CEECs.

Author: Valentina-Ioana MERA, Camélia TURCU and Monica Ioana POP SILAGHI
Volume: 2018.08
Publisher: INFER
Year: 2018
No. of pages: 29
Category: INFER working papers

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