Instability of money demand function in euro area and Russia after the financial crisis

The problem of affecting of financial crisis is actual nowadays, because despite the fact that the crisis has receded, we still can see and feel the consequences of it on Russian and European credit supply of commercial banks and the banking sector as a whole, and both sides have not yet fully recovered from the devastating impact of the global financial crisis. It’s important that financial crisis substantially affected almost all countries and, unlike previous similar situations, this economic crisis which broke out in late 2008, begun in the developed countries, and subsequently spread to the rest of the states.

A short period of apparent resilience to the global financial turmoil has given way to a deep crisis in several European emerging markets, though with substantial differentiation across the region. The crisis has put an increased premium on sound macroeconomic and macroprudential policies: countries with lower inflation, smaller current account deficits, and lower dependence on bank-related capital inflows in recent years have so far fared better.

 According to the World Bank, the Russian crisis of 2008, "began as a crisis in the private sector, due to excessive borrowing by the private sector in a deep triple shock: by the terms of trade, capital outflows and the tightening of foreign borrowing."Impact of the financial crisis on the banking system of the country is significant, what will be detailed in our article.

Objectives: The paper focuses on the impact of the financial crisis (2008-2012) on Eurozone states and Russia, especially on the credit supply of commercial banks with the regard to stability of money demand. Testing the stability of money demand function for pre-crisis period and after the crisis erupted, indicates a possible disequilibrium in the money market in Euro Area and Russia due to the crisis.

Data/Methods: We employ standard method of testing the stability of money demand function, as e.g. Hušek and Pelikán (2003) propose, which is based on multiple OLS regression and CUSUM test. The model consists of money supply (MS), measured by a monetary aggregate, as dependent variable, and short term-interbank interest rate (IR) and economic activity measured by GDP (Y), as explanatory variables. The money demand function has therefore a standard form, which is well-established in the literature (e.g. Jamal, Hsing,, (2011); Kapounek,(2011)). As Greene specifies, the CUSUM test is based on cumulative sums of residues.We test the stability of money demand function for pre-crisis (2003-2008) and crisis (2008-2012) period, on the data of Russia and selected Eurozone states.

Expected results: Understanding the reasons of instability of money demand function is of crucial importance and should be a subject of further research. The results are discussed in the sense of the Post-Keynesian theory of endogenous money. The purpose of this paper is to identify possible differences in stability of money demand in Russia and Eurozone countries during the period before the financial crisis and after the financial crisis erupted (2008-2012).