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Tests of Functional Forms, Currency Substitution, and Capital Mobility of Czech Money Demand Function

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  • Yu Hsing

Abstract

The demand for real M2 in the Czech Republic is positively influenced by real output and negatively associated with the deposit rate, the koruna/euro exchange rate, and the euro interest rate. The coefficient of real output for the demand for real M1 is insignificant. Hence, depreciation of the koruna or a higher euro interest rate would help raise Czech real output. The Box-Cox transformation test shows that the log-linear form for real M1 and M2 demand cannot be rejected at the 5% level while the linear form for real M1 and M2 demand can be rejected at the 5% level. The CUSUM and CUSUMSQ tests show that parameters in the demand for both real M1 and M2 demand are stable. In comparison, real M2 is a better monetary aggregate.

Suggested Citation

  • Yu Hsing, 2006. "Tests of Functional Forms, Currency Substitution, and Capital Mobility of Czech Money Demand Function," Prague Economic Papers, Prague University of Economics and Business, vol. 2006(4), pages 291-299.
    • Handle: RePEc:prg:jnlpep:v:2006:y:2006:i:4:id:289:p:291-299
    DOI: 10.18267/j.pep.289
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    More about this item

    Keywords

    currency substitution; wealth effect; Box-Cox transformation; capital mobility effect; cost of borrowing effect; stability tests;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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