The estimation of money demand elasiticity: case of Croatia

The estimation of money demand function provides important insight for theory and policy making. The stable demand for money in the long run is very important for the implementation of monetary policy. The income and interest rate elasticity of money demand in Croatia is estimated in this paper using Johansen cointegration method. In line with previous research, the quarterly data on money demand, interest rate and gross domestic product in Croatia are used in the cointegration analysis. The trace test and maximum eigenvalue test both show the existence of one cointegrating relation and the long run money demand function is estimated. In the long run both output and interest rate are significant in explaining money demand. The impact of domestic income on money demand is positive, while interest rate impact is negative, what is in line with relevant empirical research and economic theory. The error correction term shows that variables return into equilibrium for approximately 13 quarters. The conducted analysis offers the coefficients of interest elasticity and income elasticity of money demand which can serve in future research for calibration of dynamic stohastic general equilibrium models of Croatian economy.