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Economic Sentiments and Money Demand Stability in the CEECs

Valentina-Ioana Mera, Monica Ioana Pop Silaghi and Camelia Romocea Turcu ()
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Valentina-Ioana Mera: Babeş-Bolyai University
Monica Ioana Pop Silaghi: Babeş-Bolyai University

Open Economies Review, 2020, vol. 31, issue 2, No 9, 343-369

Abstract: Abstract This paper aims at building a money demand function that takes account of the heterogeneities of the Central and Eastern European Countries (CEECs) in the context of the European integration. We extend the traditional specification of money demand to capture the effects of a change in agents’ expectations regarding the dynamics of economic activity. The traditional determinants of the demand for money (real GDP, interest rate, inflation rate) are found to be significant and have the expected sign. Above this, we also find that the role of economic sentiments - captured through the European sentiment indicator (ESI) - is significant in explaining the money demand: consumers’ and investors’ gloomy expectations concerning future economic developments trigger an increase in the domestic money demand, due to precautionary reasons. Our results also suggest that a currency substitution effect, against both euro and USD, is present in the CEECs.

Keywords: Money demand; Economic sentiments; CEECs; Dynamic OLS (search for similar items in EconPapers)
JEL-codes: E41 E52 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11079-019-09558-2

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