Money Demand and Seigniorage in Transition

CERGE-EI Working Paper Series No. 48

25 Pages Posted: 26 Feb 2010

See all articles by Nina Budina

Nina Budina

World Bank

Jan Hanousek

Faculty of Business and Economics, Mendel University in Brno; Centre for Economic Policy Research (CEPR)

Zdenek Tuma

Czech National Bank (CNB)

Date Written: April 1, 1994

Abstract

The major objective of the paper is to provide estimates of a money demand function and of the optimal seigniorage in the Czech Republic and compare it to other transition countries such as Bulgaria, Poland and Romania, and analyze the scope of budget deficit financing through money printing. To calculate the optimal seigniorage the steady-state condition is applied to the seigniorage maximizing rate of money growth. Hence, the discussion on using models of this type in a transition economy is an important part of the paper.

An inherent part of this analysis is an estimate of money demand functions. Besides standard methods such as OLS or instrumental variables the possibility of a simultaneous estimate of the money demand function for the Czech Republic with the function of a reference country through seemingly unrelated regression is considered. This approach removes seasonality in data without losing observations or freedom, and consequently improves the estimate.

The analysis shows that the interest rate started to play its role in the demand for money in spite of extensive use of direct measures in monetary policy and extensive credit rationing. It is emphasized that the Czech Republic applied restrictive fiscal and monetary policies with the pegged exchange rate as a nominal anchor during transition. This cannot be considered as a general framework for the transition period but it is possible because of the relatively stable macroeconomic situation and sufficient international reserves. The analysis confirms that Czech Republic does not tend to use seigniorage to finance its deficit.

Suggested Citation

Budina, Nina and Hanousek, Jan and Tuma, Zdenek, Money Demand and Seigniorage in Transition (April 1, 1994). CERGE-EI Working Paper Series No. 48, Available at SSRN: https://ssrn.com/abstract=1558101 or http://dx.doi.org/10.2139/ssrn.1558101

Nina Budina (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Jan Hanousek

Faculty of Business and Economics, Mendel University in Brno ( email )

Brno
Czech Republic

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Zdenek Tuma

Czech National Bank (CNB)

One Exchange Squar
London, EC2A 2EH
Czech Republic
+44 207 338 6429 (Phone)
+44 207 3386049 (Fax)

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