Prague Economic Papers 2006, 15(4):291-299 | DOI: 10.18267/j.pep.289

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

Yu Hsing
Charles Blackwell Endowed Professor in Economics, College of Business, Southeastern Louisiana University, Hammond, Louisiana 70402, USA (yhsing@selu.edu).

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.

Keywords: currency substitution, wealth effect, Box-Cox transformation, capital mobility effect, cost of borrowing effect, stability tests
JEL classification: E41, O52

Published: January 1, 2006  Show citation

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Hsing, Y. (2006). Tests of Functional Forms, Currency Substitution, and Capital Mobility of Czech Money Demand Function. Prague Economic Papers, 15(4), 291-299. doi: 10.18267/j.pep.289
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