Money Demand in Latvia

3/2004

Abstract
The econometric analysis of the demand for broad money in Latvia suggests a stable relationship of money demand. The analysis of parameter exogeneity indicates that the equilibrium adjustment is driven solely by the changes in the amount of money. The demand for money in Latvia is characterised by relatively high income elasticity typical for the economy in a monetary expansion phase. Due to stability, close fit of the money demand function and rapid equilibrium adjustment, broad money aggregates can be used as indicators of the economic activity.

Key words: money demand, co-integration, exogeneity, vector error correction

JEL classification codes: C22, C32, E41