THE MONETARY SECTOR UNDER A CURRENCY BOARD ARRANGEMENT: SPECIFICATION AND ESTIMATION OF A MODEL WITH ESTONIAN DATA* Rasmus Pikkani** Tallinn 2000 Working Papers of Eesti Pank No 4, 2000

Modelling work on Estonian data indicates that external financing of the private sector has strong impact on domestic demand, which implies that valuable insights may be gained in this case from understanding the behavioural relationships in the monetary sector. The current paper provides a theoretical analysis of the monetary sector under a currency board regime and applies specification tests to Estonian data. As a final product, empirical equations for average lending rate, loans provided to the private sector and money demand are estimated. While estimations herein use monthly data, quarterly modifications of the model will be inserted into Eesti Pank's quarterly macromodel in the future.

* This study has been partially conducted during the author's stay at the Bank of Finland, Institute for Economies in Transition (BOFIT) and was first published in the BOFIT Online series.
** I would like to thank Iikka Korhonen, Jukka Pirttilä and Martti Randveer for their help and valuable recommendations. Comments on the present text are welcome.

Author's e-mail address: rpikkani@epbe.ee

The views expressed in this paper are those of the author and do not necessarily reflect the official view of Eesti Pank.

Table of Contents

1. Introduction

2. Overview of an orthodox currency board arrangement and Estonia's monetary system

3. Specification of the Estonian model's structure

Demand for bank credit

Supply of bank lending

4. Empirical estimation

Background

Estimation results

5. Concluding remarks

Glossary

Appendix 1: Evolution of Eesti Pank's monetary policy operational framework

Appendix 2: Results from Granger Causality Test and VAR regressions

Appendix 3: Figures

Appendix 4: Statistical protocols

References

The Monetary Sector under a Currency Board Arrangement: Specification and Estimation of a Model with Estonian Data, Working Papers of Eesti Pank No 4, 2000 (PDF*)

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