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Currency substitution, portfolio diversification, and money demand

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  • Miguel Lebre de Freitas
  • Francisco José Veiga

Abstract

dynamic optimizing model of money demand and currency substitution to the case in which the individual has restricted or no access to foreign currency denominated bonds. In this case currency substitution decisions and asset substitution decisions are not separable. The results obtained suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the presence of currency substitution. Applying this approach to six Latin-American countries, we find evidence of currency substitution in Colombia, Dominican Republic, and Venezuela, but not in Brazil and Chile.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 39 (2006)
Issue (Month): 3 (August)
Pages: 719-743

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Handle: RePEc:cje:issued:v:39:y:2006:i:3:p:719-743

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References

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  1. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
  2. Thomas, Lee R, 1985. "Portfolio Theory and Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 347-57, August.
  3. Ratti, Ronald A & Jeong, Byung Woo, 1994. "Variation in the real exchange rate as a source of currency substitution," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 537-550, October.
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Cited by:
  1. Ingrid Größl & Ulrich Fritsche, 2007. "The Store-of-Value-Function of Money as a Component of Household Risk Management," Discussion Papers of DIW Berlin 660, DIW Berlin, German Institute for Economic Research.
  2. Ivan Milenković & Milivoje Davidović, 2013. "Determinants of Currency Substitution/Dollarization – The Case of the Republic of Serbia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(1), pages 139-155.
  3. Miguel Lebre de Freitas, 2003. "Currency substitution and money demand in Euroland," NIPE Working Papers 11/2003, NIPE - Universidade do Minho.
  4. repec:ebl:ecbull:v:30:y:2010:i:1:p:624-635 is not listed on IDEAS
  5. Caroline Duburcq & Eric Girardin, 2010. "Domestic and external factors in interest rate determination: the minor role of the exchange rate regime," Economics Bulletin, AccessEcon, vol. 30(1), pages 624-635.
  6. Caroline Duburcq, 2010. "The Impact of Exchange Rate Regime on Interest Rates in Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 47(135), pages 91-124.
  7. repec:cbk:journl:v:1:y:2013:i:3:p:139-155 is not listed on IDEAS

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