Money demand and inflation in Belarus: Evidence from cointegrated VAR

The paper analyses the demand for nominal and real money balances (M1) in Belarus on the basis of the quarterly data for 1992–2003. Using cointegration analysis and dynamic equilibrium correction models, well specified and stable long- and short-run money demand functions are derived. On the basis of long-run real money demand functions the gap between money demand and supply (monetary overhang) is determined. Within the framework of short-run dynamic models for real money balances, the equilibrium correction mechanism and speed of adjustment of the system toward steady-state trajectory are investigated. Using the model of inflation with the equilibrium corrections mechanism taken from real money demand functions, the determinants of inflation in Belarus are examined.