Household Demand for Money in Poland: Theory and Evidence

IMF Working Papers, January 1, 1992

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Household Demand for Money in Poland: Theory and Evidence

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Bibliographic details

• Authors: Timothy D. Lane
• Published: January 1, 1992
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451842234.001

Overview and Research Question

• Examines household demand for narrow money in Poland during the 1980s.
• Context: shortages, common informal trade in both goods and foreign exchange, and substantial holdings of foreign currency.
• Research approach:
  • Theoretical: representative household’s holding of domestic and foreign money analyzed in a cash-in-advance model.
  • In the model, domestic currency is needed to purchase goods in official shops.
  • Either domestic or foreign currency can be used in the black market.
  • Empirical: formulation of money demand from the model is estimated using household-level data from 1979 to 1988.

Theoretical framework and implications

• Cash-in-advance model structure:
  • Differentiates transaction roles of domestic currency (official shops) versus domestic or foreign currency (black market).
  • Implies a money demand relationship that incorporates choice between domestic and foreign money holdings given market segmentation (official vs. black market).
• Conceptual emphases and terminology preserved from source:
  • Narrow money, foreign currency, expected return, store of value, mattress money, money balance, money holding, sight deposit.

Empirical strategy and data

• Data:
  • Household-level data covering 1979 to 1988.
• Estimation objective:
  • Estimate the money demand formulation derived from the theoretical model using the household data.

Findings and substantive conclusions (as presented)

• The paper provides an estimated formulation of household money demand in the presence of:
  • Shortages in official markets.
  • Informal trade in goods and foreign exchange.
  • Substantial holdings of foreign currency by households.
• Focused insights (topics addressed in the paper):
  • Interaction between market exchange rates (official and black market) and household money holdings.
  • Role of inflation and expected return on choice between domestic and foreign currency holdings.
  • Implications for money demand measurement in a socialist economy with pervasive informal economy activity.

Subjects and keywords (topics covered)

• Subjects: Consumption, Demand for money, Economic sectors, Foreign exchange, Inflation, Informal economy, Market exchange rates, Money, National accounts, Prices
• Keywords: Consumption, Demand for money, expected return, foreign currency, Inflation, Informal economy, Market exchange rates, mattress money, money balance, money demand, money holding, money market, narrow money, retail price index, sight deposit, socialist economy, store of value, WP, zloty money