Money Demand in an Open Transition Economy

This article offers an internationalized view of the demand for money as applied to the Czech Republic. The traditional money demand function, consisting purely of domestic variables, is extended to include certain foreign determinants that likely affect the demand for money in a small open transition economy. In this respect, both narrow and broad money are considered. Several estimation techniques, DOLS, DGLS, the Johansen method, and ARDL, are applied to increase robustness of the results acquired. The stability of the estimates obtained is tested to study changes in the estimated relations during the transition period. Finally, estimates of the possible effects of money market disequilibria on prices and output are presented. The results suggest that international variables are significant mainly in the context of broad money demand and that liquidity gaps significantly influence prices and output dynamics.