Demand for Money in the Transition Economy : The Case of the Czech Republic 1993–2001

In this paper we strive to present a somewhat internationalised view of demand for money as applied to the Czech Republic. We extend the traditional money demand function, consisting purely of domestic variables, to include certain foreign determinants that probably affect the demand for money in a small open transition economy. We do so in the case of both narrow and broad money. For the purposes of generalisation and robust estimates we employ several estimation techniques, namely the Johansen procedure, ARDL, DOLS and ADL. We also consider the aspect of the stability of such estimates. Finally, we analyse the possible effects on prices and output of disequilibria on money market. We have found that a liquidity gap probably has a significant influence on both prices and output.