The monetary sector under a currency board arrangement : Specification and estimation of a model with Estonian data

Abstract

Modeling 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 behavioral 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. Key words: currency board, economic modelling, bank lending, capital flows, Estonia