Dynamic modelling of the demand for money in Latvia

This study develops a money demand model for Latvia for the period from 1996 to 2006. The model isspecified in the error-correction form based on a single co-integrating vector between real money balances, gross domestic product, long-term interest rate, and the rate of inflation. The model meets all three requirements for ‘stability’ put forward in Judd and Scadding (1982). The model is both well-specified and highly parsimonious. It demonstrates high explanatory power in sample as well as accurately forecasting real money balances out of sample.