THE MONEY DEMAND IN ROMANIA. PhD. Cornelia Tomescu Dumitrescu University Constantin Brancusi from Tg-Jiu, Romania, Faculty of Economics

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1 THE MONEY DEMAND IN ROMANIA PhD. Cornelia Tomescu Dumirescu Universiy Consanin Brancusi from Tg-Jiu, Romania, Faculy of Economics The empirical moeling of he money eman has as a saring poin, ypically 1, a general specificaion for he long erm money eman of he form: where, M = f ( y; r; x) M is he money eman in real erms, y is a scale variable ha measures he level of he economic aciviy, r is a vecor of variables ha inercep he opporuniy cos of he money holing an x is a vecor of oher variables (incluing ummy variables) ha will be inclue in he moel. The relaionship presupposes an immeiae ajusmen (insananeous) of he acual money holings owars heir level on long erm, namely, an equilibrium beween he real eman an offer of money. This hing is slighly plausible given being he coss of ransacion an he inceriue. Furhermore, he esire level of he money holings is unnoiceable. M Because of he marke clearing mechanism, we can consier ha s = M = M (he currency offer is equal wih he currency eman an we noe his level wih M). Therefore, we can use he series of aa referring o he currency offer in he analysis of he money eman. The money holings are measure hrough he M in lei, efine by cash ousie he banking sysem, call eposis, populaion economies an a erm lei eposis. We exclue he currency hrough he efiniion of he M aggregae, parly because of he lack of informaion relae o he populaion s currency holings ha we suspec o have been significan. Even hough he hef of he resiens currency eposis (FCD) in M is significan, reaching o aroun 30% in he las few years, here is no powerful proof ha he currency was a significanly paymen insrumen or accoun uniy. FCD are mosly a 1 Sriram, S.S. (1999a) The long erm in his paper oesn refer o a very long perio of ime. The perio of ineres in his paper covers 5 years an 3 monhs using monhly aa.

2 form of acives ha he populaion uses in meiums wih high inflaion an volaile exchange rae in orer o subsiue he eposis in naional currency. For he scale variable as a measure of he economic aciviy we chose he fix base inex of he real inusrial proucion (eflae hrough he consumpion prices inex) as proxy for he gross inernal prouc ha is no calculae wih monhly basis in Romania. The proper measure for he opporuniy cos of he aggregae M is ifficul o be eermine a priori ue o he limie an flucuan availabiliy of he lei an currency acives beween 1996 an 00 (annex ). In he analysis we use he following opporuniy coss: ¾The passive ineres rae for he non-banking cliens as a measure for he R. own profiableness of he lei eposis ( ) ¾The ineres rae (of he efficiency) of he sae iles as a measure of he R. ou efficiency of he acives ousie M ( ) The relaive imporance of he alernaive acives for he money holings varie a lo in he las few years. The enominae eposis in currency consiue an imporan alernaive for he naional currency holings (see figure 1), especially afer he liberalizaion of he currency marke in March Figure 1 The hef in currency (he currency eposis of he resiens) in oal M The evelopmen of he capial marke from Romania offere a series of alernaives for he banking eposis: he real values, he invesmen founs an he sae

3 iles. Though, he capializaion of he marke for hese acives says kin of low (figure ). The bursar capializaion of he acions slighly reache % of he GIP in he las hree years. The placemens in he invesmen founs reache below 1% from he GIP. An ineresing evoluion ha he placemens in sae iles (figure 3). In many perios, he placemens in sae iles ha higher efficacy han he banking eposis. A he same ime, a seconary marke for he sae iles evelope. The laely ecline of he sae iles placemens are ue o he ecrease of he ineres rae associae o hem. Figure The bursar capializaion in M (%) Figura 3 The percenage miniserial crei in M ¾The expece rae of inflaion approximae hrough he rae of inflaion from he curren monh p surprises he profiabiliy of he real acives. The necessiy of he inclusion of he expece rae of inflaion was accenuae in he case of he eveloping economies in which, given being he weak evelopmen of he financial

4 sysem, he real acives represen a moaliy of proecion agains he inflaion an alernaive acives in he porfolio of he non-banking agens. 3 ¾The expece epreciaion of he leu-ollar course. Measures he profiabiliy of he ollar holing, imporan acives from ousie M. The curren epreciaion is use as proxy for he expece one. We will analyze hree moels (specificaions): 1. The firs moel specific especially for a close economy in which he opporuniy cos is limie o he one for he lei acives. In esimaions, we will use a (semi-) log-linear form: own ou m γ 0 + γ 1 y + γ R + γ 3R + γ 4 = p (8) where he small leers variables are expresse in logarihms, an money eman, own m represens he real R an R ou represens he nominal rae of he profiabiliy of he financial acives inclue, respecively exclue, from he efiniion of he moneary aggregae, p represening he annualize rae of inflaion. In he relaion (8) he homogeneiy in prices of he long erm money eman is suppose. In he equaion (8), γ 1 measures he long erm elasiciy of he money eman epening on he scale variable, while γ, γ 3 an γ 4 represen semi-elasiciies epening on he rae of he profiabiliy of he financial acives inclue, respecively, exclue, from he efiniion of he moneary aggregae an he rae of inflaion. We can expec, accoring o he economical heory, ha γ 1 > 0, γ > 0, γ 3 > 0, γ 4 > 0 an possible, γ = γ 3. Lasly, he long erm money eman can be expresse as a funcion by he sprea R - R own ou, which can be inerpree as an opporuniy cos for he money holings. Regaring he sign of he inflaion coefficien, in general, his one has o be negaive. The agens prefer o eain real acives raher han moneary acives in high inflaion perios. I is hough possible for he inflaion o have a posiive coefficien relae o he long erm money eman because when he agens expec he inflaion o 3 The basic iea is ha in he eveloping economies, in which he invesmen possibiliies given by he capial marke are limie, he subsiuion of he acives especially refers o he replacemen of he money holings wih physical, real acives raher han wih he financial acives. This hing isn very consisen in Romania uring he analyze perio, a saisical role significan in he eerminans of he long erm money eman being aribue o he sae iles, while he inflaion mosly influences on shor erm.

5 increase, hey can increase he money holings expecing an increase of he planne expenses (Jusoh (1987)). As we ve seen in he firs par of his paper, a series of heories susain some paricular values for γ 1. Thus, in he Baumol-Tobin moel γ 1 =0.5, in he money s quaniaive heory γ 1 =1. Values bigger han 1 for γ 1 are o be foun in a lo of empirical suies regaring he money eman for M, values inerpree, in mos cases, as approximaing he wealh effecs.. The secon moel a moel for an open economy in which he variables for he opporuniy cos also comprise he profiabiliy rae for he acives in measure currency hrough he epreciaion of he exchange rae. The acual epreciaion is use as a proxy for he expece epreciaion. In esimaions, we will also use a (semi-) log-linear form: m own ou = γ + γ y + γ R + γ R + γ p + ED (8) γ 5 where ED represens he epreciaion of he exchange rae calculae as E E E being he exchange rae in he momen expresse in lei a an USA ollar. We can expec, accoring o he economical heory, γ 5 < 0, an increase of he expece epreciaion of he exchange rae will lea o an increase of he money holings raing an, as a consequence, he agens will subsiue he naional currency wih he foreign currency (Simmons 4 (199)). 3. The hir level inclues he level of he exchange rae as a proxy for he m converibiliy risk. The form use in esimaions will be: own ou = γ + γ y + γ R + γ R + γ p + E (8) γ 6 The variables use are presene in able 1. As a big par of he series use presen regular seasonal evoluions, i is necessary o ake ino accoun he seasonal facor in esimaions. We will realize his hing in wo ways: he firs moaliy we will ajus he seasonal series using he Tramo-Seas proceure; he secon moaliy we will use he unajuse 1 1, E 4 The possibiliy of obaining boh a posiive an negaive relaion beween he epreciaion of he exchange rae an he naional currency holings is accenuae. The impac can be negaive if he epreciaion of he naional currency will lea from anicipaions o fuure epreciaions. On he oher han, a posiive impac can resul if he epreciaion creaes expecaions regaring a fuure appreciaion of he naional currency.

6 series an we will a he seasonal monhly ummy variables 5. To noe he fac ha, if he sanar ummy 0-1 variables are inclue, hey will influence boh he mean an he series ren. In orer o preven his, o surprise he seasonaliy, we will use cenere seasonal ummy variables (orhogonalize) as Johansen suggese. These change he mean, bu wihou conribuing o he ren. Table 1 The ime series use LMR The logarihm of he large scale real moneary mass LMR_SA LYRIBF LYRIBF_SA p p_sa LE ED DP DTS The logarihm of he large scale real moneary mass seasonally ajuse The logarihm of he real inusrial proucion inex (ecember 1995=1) The logarihm of he real inusrial proucion inex seasonally ajuse The level of he annualize monhly inflaion The level of he annualize monhly inflaion seasonally ajuse The logarihm of he nominal ROL/USD exchange rae The epreciaion of he exchange rae The meium passive banking ineres rae for he non-banking cliens The meium capaciy for he sae iles (reasury cerificaes wih ineres rae an iscoun) The esimaions are realize in a number of seps. Firs an foremos, uni roo ess are effecuae for he series of ineres in orer o eerminae he saionariy of he iniviual series. As in oher suies abou he money eman, he large scale real moneary mass only has a uniary roo, hing which means ha i is saionary in prime ifferences. The esimaions are realize wih monhly aes from January 1996 unil March 00. The aes preceen o Sepember 001 are use for esimaions an he lef observaions (6 monhs) are use for forecasing. 5 A priori, is ifficul o choose beween he wo moaliies of surprising he seasonaliy. The seasonal ajusmens are realize using he Tramo-Seas proceure. The use of he seasonally ajuse aa can influence he ynamic moeling (Ericsson, Henry an Tran (1994)). The alernaive approach hrough he inclusion of some seasonal ummy variables is no perfec in is urn, necessiaing consan seasonal facors (as compare o Tramo-Seas, which permis he seasonal facor o evolve in ime) an uses more freeom egrees, leaing in his way o he reucion of he saisical ess. Tramo-Seas has he avanage, when compare o oher mehos of seasonal ajusmen, he fac ha i gives beer resuls in he presence of some exreme values of he series an srucural changes (ouliers).

7 Saionariy ADF (Augmene Dickey Fuller) an PP (Philips Perron) ess are realize. The resuls are presene in able 6. The number of lags use for he saionariy ess were chosen base on he AIC (Akaike informaion crierion) an SC (Schwarz crierion) minimizaion crieria. Excep he epreciaion of he exchange rae an he inflaion, he variables are firs orer inegrables in he level (appenix), hing which is consisen wih a saionary represenaion in prime ifferences. Table The resuls of he saionariy ess (*he variables are in logarihm) TheVariable The ADF Tes The PP Tes The real moneary mass* (1) C I(1) C The real inusrial proucion* I(1) C I(1) C The exchange rae* I(1) C T I(1) C T The exchange rae s epreciaion I(1) C sau I(0) C I(0) C The inflaion I(1) C sau I(0) C I(1) C sau I(0) C The passive ineres rae I(1) C T I(1) C T The sae iles ineres rae I(1) C T I(1) C T The seasonally ajuse series The real moneary mass* I(1) C I(1) C The inflaion I(1) C sau I(0) C I(1) C sau I(0) C The real inusrial proucion* I(1) C I(1) C The series non-saionariy moivae he use in analysis of he Johansen mulivariae proceure (shorly escribe in Appenix I) in orer o ienify he presence of a long erm saionary relaion (co-inegraion) among non-saionary series. Table suggess ha none of he variables is a secon orer (I()) or bigger inegrable. The exchange rae s inflaion an epreciaion are probably I(0) (a 10%). This oesn mean ha he wo variables mus be exclue from he co-inegraion vecor. This hing can be explaine by he fac ha, as Dickey an Rossana (1994) remark, he co-inegraion es (Appenix III) can be use even if some of he series are saionary. Taking ino 6 The resuls of he saionariy ess mus be looke a wih pruence, given been he ess weak power in he presence of he srucural breaks.

8 consieraion ha five variables are I(1) an none is I() or bigger, he necessary coniions for a vali co-inegraion are no violae. One of he avanages of he Johansen proceure is he one ha permis us o emphasize he ajusmen spee owars he long erm equilibrium an o es he weakly exogenous of he explicaive variables (if a variable s ajusmen power is no significanly ifferen from zero, he variable is weakly exogenous) 7. We eermine he number of lags use in co-inegraion by esimaing a VAR wih ineres variables. For his VAR, using he crieria LR, FPE, AIC, SC an HQ, we will choose he opimal number of lags. If he opimal number of lags for he VAR is p, hen we will esimae he VEC wih p-1 lags. In he firs phase, we realize he ess wih he seasonally ajuse variables. The ess were realize wih or wihou ummy for he shocks in 1997 (ummy9701 which akes he value 1 in January 1997 an 0 for he res an ummy9703 which akes he value 1 in March 1997 an 0 for he res 8 ). The resuls obaine wih he ummy variables were unsaisfacory, he coefficiens aache o he menione ummy variables being insignifican from a saisical poin of view an, as a consequence, we reesimae he relaions wihou hese variables (able 3). Table 3 The long erm co-inegraion relaion Proucion Passive Ineres Rae Sae iles Ineres Rae Inflaion Coef. SE/ 3/ Coef. SE Coef. SE Coef. SE I 6/ 1.39* * * * II 7/ 1.33* * * * III 8/ 1.46* * * * Depreciaion Exchange Rae Ajusmen Spee RMSE 4/ Coef. SE Coef. SE Coef. SE Saic Dynamic I 6/ -0.04* II 7/ -0.46* * III 8/ -0.34* * * significan a a level of 5%; **significan a a level of 1% 7 Ericsson (199) presens he conceps of weak, srong an super exogeneiy an heir relaion wih he co-inegraion analysis. 8 The resuls of he VEC, afer he inroucion of a sanar ummy variable 0-1, mus be looke upon wih precauion.

9 û/05b6$ û/<5,%)b6$ û'3 û'76 û3b6$ û(' û/( I χ ( 1) = 5.5 χ ( 1) = 1.99 χ ( 1) = 0. χ ( 1) = 8.9 χ ( 1) [0.018]5 /* [0.16] [0.64] [0.00]** [0.9] = 0.01 II χ ( 1) = 1.4 χ ( 1) = 0.77 χ ( 1) = 1.80 χ ( 1) = 4.4 χ ( 1) = 0.13 χ ( 1) [0.00]** [0.38] [0.18] [0.04]* [0.7] [0.5] = 1.8 III χ ( 1) = 0.03 χ ( 1) = 0.60 χ ( 1) = 0.45 χ ( 1) = χ ( 1) = 0.00 χ ( 1) [0.00]** [0.43] [0.50] [0.00]** [0.98] [0.98] 1/ Seasonally ajuse aa; / Sanar error; 3/ saisical-t; 4/ Roo mean square error for forecas; 5/ he null hypohesis is ha here is weak exogeneiy (in sraigh parenhesis he probabiliy); 6/ he VEC is esimae wih 4 lags; 7/ he VEC is esimae wih 3 lags; 8/ he VEC is esimae wih 4 lags. ** an * inicae he rejecion of he null hypohesis a a limi of 1%, respecively 5 %. = 0.00 Refferences: 1. ANDREI, T. 6WDWLVWLFúLeconomerie,%XFXUHúWL(GLWXUD(FRQRPLFD. ANSION, G. Les méhoes es prevision en économie, Paris, Arman Collecions, DOBRESCU, E. 7UDQ]L LDvQ5RPkQLD. $ERUGULHFRQRPHWULFH%XFXUHúWL (GLWXUD(FRQRPLF 4. PECICAN, E. 3LD D YDOXWDU EQFL & economerie %XFXUHúWL (GLWXUD (FRQRPLF 5. TOMESCU-DUMITRESCU CORNELIA, (FRQRPHWULH JHQHUDO úl ILQDQFLDU%XFXUHúWL(G'LGDFWLFúL3HGDJRJLF