The Money in Circulation Demand

The paper discusses the main determinants of money-in-circulation demand in the Czech economy from 1996 to 1999. The volume of intended transactions (approximated by retail revenue from sales), the opportunity cost of holding cash (approximated by interest rate) and the expected rate of inflation are identified as the factors that most importantly account for the development of cash demand. A simple regression model was estimated in order to quantify the relationships among the aforementioned variables. Further, the author attempted to estimate the time lags between the explanatory variables? developments and the development of money in circulation. The paper concludes that money in circulation is not a very precise leading indicator of demand.