The determinants and stability of money demand in the Republic of Macedonia

The goal of this paper is to examine the long and short-run determinants, and stability of money demand (M1) in the Republic of Macedonia using monthly data from January 2005 to October 2012. The Johansen cointegration technique and VECM model were used to find the long-run and short-term dynamic relationships in money demand model. Empirical results provide the evidence that exchange rate and interest rate payable on denar time deposits up to one month explains the most variations of money demand in the long-run, while interest rate is significant only in short-run. Long-run money demand function is estimated to indicate slow speed of adjustment of removing the disequilibrium. Our finding shows that real money demand M1 in the Republic of Macedonia is stable in the analyzed period. The results obtained in this study suggest that the National Bank should carefully monitor the exchange rate and inflation as two most important indicators of monetary policy, because these two determinants are the main drivers of demand for money in the short and long term. [PUBLICATION ABSTRACT]