Money-in-the-Utility-Function: Model Simulations and Money Demand Estimation in the Case of the Republic of Macedonia

Ivanov Mile (), Petkovski Mihail () and Naumovska Elena ()
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Ivanov Mile: Faculty of Economics, Ss Cyril and Methodius University in Skopje
Petkovski Mihail: Faculty of Economics, Ss Cyril and Methodius University in Skopje
Naumovska Elena: Faculty of Economics, Ss Cyril and Methodius University in Skopje

South East European Journal of Economics and Business, 2015, vol. 9, issue 2, 7-20

Abstract: This paper aims to reassess and analyze the dynamic interactions between money, prices and economic activity in the case of the Republic of Macedonia. The first part of the paper simulates the property of the superneutrality of money, based on Sidrauski’s (1967) framework. The second part presents the money demand estimations on the monetary aggregate M2 for the period from 2002 to 2012, using the cointegration approach. Following Cziráky and Gillman (2006), we examine the validity of the Fisher equation in the case of Macedonia. The Fisher equation does not hold in the case of Macedonia, so the inflation rate must be included in the money demand specification. The estimated cointegration equation is in line with economic theory. The cointegration equation shows income elasticity less than unity (0,81), small and negative interest rate semi-elasticity (-0.17) and negative elasticity with respect to inflation. The short-run dynamics reveal that only 2,70% of the disequilibrium is corrected in a single quarter. The properties of stability imply that the M2 aggregate may serve as a proper policy indicator.

Keywords: money- in-the-utility function; demand for money; cointegration (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:seejeb:v:9:y:2015:i:2:p:7-20:n:3

DOI: 10.2478/jeb-2014-0006

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