MONEY DEMAND IN ROMANIAN ECONOMY, USING MULTIPLE REGRESSION METHOD AND UNRESTRICTED VAR MODEL

Abstract: The paper describes the money demand in Romanian economy using two econometrics models. The first model consist in a multiple regression between demand money, monthly inflation rate, Industrial production Index and the foreign exchange rate RON/Euro. The second model (Unrestricted Vector AutoRegressive model) is applied for the same variables used in the first model. Identifying a statistically strong model, capable of stable estimations for the money demand function in Romania’s economy constitutes a prerequisite to the application of an efficient monetary policy. Key words: money demand; unrestricted VAR model; Romania Multiple regression estimation of Romanian money demand function The theory underlying money demand function is based on the classical macroeconomic model of Hicks & Hansen IS-LM, specifically LM curve. The theoretical hypothesis (assumptions) of the dual equilibrium model for the money market in an open economy are: the perfect mobility of capital, uncovered interest rate parity principle, monetary policy conducted by the central bank are using the short term interest rate variable as the operational one without affecting the stability of the exchange rate of the national currency. The LM curve is defined by the all possible combinations of interest rate and income levels for which the demand of money is equal with money supply (Figure 1.)