The Demand-for-money Function

Abstract

The stability and credibility of a national currency is one of the key factors for successful national economic development. Knowledge of the long-run demand for money helps the monetary authorities to determine what is the rate of growth of the money stock that would not lead to an excessive money supply and, consequently, would not accelerate inflation. Also, it allows to avoid the costs incurred by the central bank in case it has to curb down an excess demand for money, and in doing so contribute to economic recession. The possible costs of mistakes in targeting the money stock are likely to be much higher for a transitional economy: a trade-off between transitional inflation and recession is much more difficult to discern than in a standard market economy, and credibility once lost is extremely hard to re-gain.