Currency substitution, capital mobility and money demand

Cuddington, John T.

doi:10.1016/0261-5606(83)90010-4

Cited by 160 publications

(79 citation statements)

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“…In an empirical context, it is most common to estimate just the demand for money function of the form specified in equation (3) (Miles, 1978 andCuddington, 1983). We estimate a variant of equation (3) by replacing domestic money demand with currency substitution index, which is the focus of this study.…”

Section: Model Specificationmentioning

confidence: 99%

“…More recently, Girton and Roper (1981), Cuddington (1983), Branson and Henderson (1985) Zervoyianni (1988, 1992, Mizen and Pentecost (1996) and Rogers (1996) among others have extended the model to include the possibility of currency substitution 3 . As in Tobin (1958), these models all assume that agent maximize the returns to their wealth subject to a given level of risk.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

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Exchange Rate Volatility, Currency Substitution and Monetary Policy in Nigeria

Yinusa¹,

Akinlo²

2010

Bots. J. Eco.

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JEL: E41, F31 KEY WORDS: Demand for money, Exchange Rate Volatility, Currency Substitution, MonetaryPolicy and Nigeria. IntroductionIn the last few years, a number of emerging market economics including Nigeria have moved from fixed to flexible exchange rates. This has in most cases led to instability in the exchange rates thereby creating an atmosphere of uncertainty exacerbated by speculative bubbles, which help to aggravate the problem of inflation in the economy. Under conditions of high inflation, the ability of national currencies to function adequately as a store of value, a unit of account, and a means of exchange are greatly hindered (Mizen and Pentecost, 1996).In these circumstances, the domestic currency tends first to be displaced as a store of value by a stable and convertible currency (usually in the form of interest-bearing foreign currency deposits). Long period of high inflation induce the public also to conduct transactions in foreign currency (Currency Substitution) 1 .Over time, Nigerian governments validated partial dollarization by allowing residents to open bank accounts denominated in dollars (domiciliary account). In addition, contracts foreign and domestic debts were valued and quoted in dollars while monetary compensation 1 Currency substitution or dollarization (as is often referred to in the literature) episodes became manifest in the late 1980s, and 1990s when most economies were experiencing rapid inflation and exchange rate instability 3 to athletics and footballers were made in dollar denominations. In fact, many big supermarkets in big cities, in Nigeria, quote the prices of their products in dollars and many estate agents and valuers only accept dollars as rents for houses in some reserved areas of Lagos, Abuja, Port Harcourt and other industrialized cities in Nigeria. All these developments point to the existence of currency substitution in Nigeria.Research attempts into causes and effects of currency substitution have been diverse and highly controversial especially in the developed, emerging market and transitional economies of the Latin America and Asia (see for example, Rogers, 1996;Sahay and Vegh, 1996; Savastano, 1996, Reinhart, Rogoff and Savastano, 2003, Yeyati, 2006. The volume of studies reflects the fact that currency substitution is a subject with global effects, which merits the attention of academics and policy-makers alike (Mizen and Pentecost, 1996;and Corrado, 2008). However in the African context, prominent attention has not been given to the study of currency substitution.For example, direct studies on currency substitution in Nigeria have been rare.Oresotu and Mordi (1992) tested the existence of currency substitution by including exchange rate as one of the explanatory variables in the aggregate money demand functions. Their result points to the existence of currency substitution in Nigeria. Specific studies addressed to the issue of currency substitution were Olomola (1999) and Akinlo (2003).The main feature of these studies is that they were d...

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Section: Model Specificationmentioning

confidence: 99%

Section: Theoretical Frameworkmentioning

confidence: 99%

Exchange Rate Volatility, Currency Substitution and Monetary Policy in Nigeria

Yinusa¹,

Akinlo²

2010

Bots. J. Eco.

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“…It has been suggested that foreign interest rates can be included in the money demand function since there could be some degree of substitutability between domestic and foreign financial assets (Cuddington, 1983). Hamburger (1977, p.31) argues that it is the domestic interest rate that determines money holdings by the public.…”

Section: Theoretical Background Of a Stable Long-run Money Demandmentioning

confidence: 99%

Currency substitution and nonlinear error correction in Taiwan's demand for broad money

2007

Applied Economics

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We modify the conventional money demand function by including a real exchange rate variable to reflect the effect of currency substitution. Empirical evidence indicates that the variable is crucial to the long-run stability of Taiwan's money demand. After finding the failure of a linear error-correction model in describing the dynamics of Taiwan's money demand, we apply a non-linear errorcorrection model to examine its dynamics and support the appropriateness of the non-linear model empirically. JEL: E41, C22

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“…An expected exchange rate depreciation (that reduces the value of domestic assets held by foreigners and increases the value of foreign assets held by domestic residents), may therefore give rise to substitution of foreign currencies for domestic currencies, thereby reducing domestic money demand. Early studies that emphasize currency substitution in their analysis of money demand include Arango and Nadiri (1981), Girton and Roper (1981), Miles (1981), McKinnon (1982), Cuddington (1983) and Ortiz (1983). This paper derives a stable empirical model for Venezuela broad money (M2), using cointegration methods as a tool for identifying long run relationships that can be embedded in a dynamic equilibrium correction model (EqCM) with constant parameters.…”

Section: Introductionmentioning

confidence: 99%

A stable demand for money despite financial crisis: the case of Venezuela

Bjørnland

2005

Applied Economics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: This paper investigates the demand for broad money in Venezuela, over a period of financial crisis and substantial exchange rate fluctuations. The analysis shows that there exist a long run relationship between real money, real income, inflation, the exchange rate and the domestic interest rate, that remains stable over major policy changes and large shocks. The long run properties emphasize that both inflation and exchange rate depreciations have negative effects on real money demand. The long run relationship is embedded in a dynamic equilibrium correction model with constant parameters. Terms of use: Documents in

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Currency substitution, capital mobility and money demand

Cited by 160 publications

References 10 publications

Exchange Rate Volatility, Currency Substitution and Monetary Policy in Nigeria

Exchange Rate Volatility, Currency Substitution and Monetary Policy in Nigeria

Currency substitution and nonlinear error correction in Taiwan's demand for broad money

A stable demand for money despite financial crisis: the case of Venezuela

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