An Analysis of Demand for Money in the Lao People’s Democratic Republic

Abstract

This paper is aimed at exploring the dynamic relationship between money bal- ance and four other macroeconomic variables: real GDP, expected inflation, exchange rates, domestic and foreign interest rates by modeling and testing for sta- bility of money demand functions in the Lao People’s Democratic Republic (PDR) during the period of 1993:Q1-2010:Q2. Demands for narrow money, broad money and board money in foreign currencies were estimated. The estimated results sug- gested that all demand functions are stable. They can be intermediate targets of the Bank of the Lao PDR. The substantial results point out: (i) there is an evidence of ample influence of exchange rates and interest rate on money balances in the Lao PDR; (ii) expected inflation indicates the effect of high inflation episodes on money balances, especially in terms of foreign currency, and (iii) the local currency, the Kip, is used predominantly for transaction purposes rather than foreign currencies.