Money Demand in Post-Crisis Russia: De-Dollarisation and Re-Monetisation

Posted: 4 Sep 2007 Last revised: 22 Oct 2007

See all articles by Iikka Korhonen

Iikka Korhonen

Bank of Finland - Institute for Economies in Transition (BOFIT)

Aaron N. Mehrotra

Bank for International Settlements (BIS)

Date Written: June 29, 2007

Abstract

Estimating money demand functions for Russia following the 1998 crisis, we find a stable money demand relationship when augmented by a deterministic trend signifying falling velocity. As predicted by theory, higher income boosts demand for real rouble balances and the income elasticity of money is close to unity. Inflation affects the adjustment towards equilibrium, while broad money shocks lead to higher inflation. We also show that exchange rate fluctuations have a considerable influence on Russian money demand. The results indicate that Russian monetary authorities have been correct in using the money stock as an information variable and that the strong influence of exchange rate on money demand is likely to continue despite de-dollarisation of the Russian economy.

Keywords: money demand, vector error correction models, dollarisation, Russia

JEL Classification: E31, E41, E51, P22

Suggested Citation

Korhonen, Iikka and Mehrotra, Aaron N., Money Demand in Post-Crisis Russia: De-Dollarisation and Re-Monetisation (June 29, 2007). BOFIT Discussion Paper No. 14/2007, Available at SSRN: https://ssrn.com/abstract=1001397 or http://dx.doi.org/10.2139/ssrn.1001397

Iikka Korhonen (Contact Author)

Bank of Finland - Institute for Economies in Transition (BOFIT) ( email )

P.O.Box 160
Helsinki 00101
Finland

Aaron N. Mehrotra

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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