An analysis of demand for money in the Lao People’s Democratic Republic. This paper is aimed at exploring the dy namic relationship between money bal- ance and four other macroeconomic variables: real GDP, expected inflation, exchange rates, domestic andforeign interest rates by modeling and testing for sta- bility of money demand functions in the Lao People’s emocratic Rep ublic (PDR) during the p eriod. | Journal of Economics and Development Vol. 14, , December 2012, pp. 47 - 62 ISSN 1859 0020 An Analysis of Demand for Money in the Lao People’s Democratic Republic Tran Tho Dat National Economics University, Vietnam Email: tranthodat@ Ha Quynh Hoa National Economics University, Vietnam Somphao Phaysith Bank of the Lao PDR, Laos Abstract This paper is aimed at exploring the dynamic relationship between money balance and four other macroeconomic variables: real GDP, expected inflation, exchange rates, domestic and foreign interest rates by modeling and testing for stability 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 suggested 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. Keywords: Demand for money, long-run relationship, narrow money, broad money, error correction model. Journal of Economics and Development 47 Vol. 14, , December 2012 1. Introduction opened for more than one year. The financial market is developing within a limited scope. Credit is limited and meets only 15 percent of the requirements with high nonperforming loans. The Lao economy is also partially dollarized. The total amount of foreign currency deposits to broad money was percent in 1992 and 55 percent to the end 2011. Demand for money plays a major role in macroeconomic analysis, especially in selecting appropriate monetary policy .
