Dynamic modelling of the demand for money in Latvia
Boriss Siliverstovs, KOF Swiss Economic Institute, ETH Zurich
Abstract: This study develops a money demand model for Latvia for the period from 1996 to 2006. The model isspecifi ed in the error-correction form based on a single co-integrating vector between real money balances, gross domestic product, long-term interest rate, and the rate of infl ation. The model meets all three requirements for ‘stability’ put forward in Judd and Scadding (1982). The model is both well-specifi ed and highly parsimonious. It demonstrates high explanatory power in sample as well as accurately forecasting real money balances out of sample.
Keywords: M2 money demand, stability, new EU Member States, Latvia
JEL Classification: C32, E41