Stable Money Demand and Nominal Money Causality of Output Growth: a Multivariate Cointegration Analysis of Croatia
نویسندگان
چکیده
The paper identifies monetary economic features of the post-transition Croatian economy, with a view towards using inflation rate targeting to reach European Union (EU) inflation targets as required by EU accession. If focuses on the demand for real money balances, the Fisher equation of interest rates, and the effect of nominal money on output, for Croatia over the 1994-2002 period. The real money demand is found to be stable using cointegration techniques after the inclusion of inflation rate in addition to the nominal interest rate. Including the inflation rate ameliorates the failure of the nominal interest rate to move one-for-one with inflation as predicted by the Fisher equation of interest rates, which is found not to hold. In addition a vector error-correction model finds that money grow rates Granger-cause output growth rates, in line with the literature on the negative effect of inflation on growth. With a stable money demand and indications of the negative growth effect of inflation, the targeting of a low inflation rate emerges as a plausible policy for establishing EU monetary accession criteria and for increasing economic growth.
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