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Currency substitution, portfolio diversification, and money demand

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Author Info
Miguel Lebre de Freitas
Francisco José Veiga

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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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File URL: http://economics.ca/cgi/xms?jab=v39n3/CJEv39n3p0719.pdf
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Publisher 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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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kamin, Steven B. & Ericsson, Neil R., 2003. "Dollarization in post-hyperinflationary Argentina," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 185-211, April. [Downloadable!] (restricted)
  2. Miles, Marc A, 1978. "Currency Substitution, Flexible Exchange Rates, and Monetary Independence," American Economic Review, American Economic Association, vol. 68(3), pages 428-36, June.
  3. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September. [Downloadable!] (restricted)
    Other versions:
  4. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  5. Chang, Roberto, 1994. "Endogenous Currency Substitution, Inflationary Finance, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 903-16, November. [Downloadable!] (restricted)
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  6. Lebre de Freitas, M., 2004. "The dynamics of inflation and currency substitution in a small open economy," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 133-142, February. [Downloadable!] (restricted)
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  7. Bergstrand, Jeffrey H. & Bundt, Thomas P., 1990. "Currency substitution and monetary autonomy: the foreign demand for US demand deposits," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 325-334, September. [Downloadable!] (restricted)
  8. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-98, August. [Downloadable!] (restricted)
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  9. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December. [Downloadable!] (restricted)
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  10. 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. [Downloadable!] (restricted)
  11. Smith, Constance E, 1995. "Substitution, Income, and Intertemporal Effects in Currency-Substitution Models," Review of International Economics, Blackwell Publishing, vol. 3(1), pages 53-59, February.
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  13. Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October. [Downloadable!] (restricted)
  14. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June. [Downloadable!] (restricted)
  15. Imrohoroglu, Selahattin, 1994. "GMM Estimates of Currency Substitution between the Canadian Dollar and the U.S. Dollar," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 792-807, November. [Downloadable!] (restricted)
  16. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier. [Downloadable!] (restricted)
  17. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August. [Downloadable!] (restricted)
  18. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416. [Downloadable!] (restricted)
  19. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July. [Downloadable!] (restricted)
  20. Pablo Guidotti & Carlos A. Rodríguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," CEMA Working Papers: Serie Documentos de Trabajo. 81, Universidad del CEMA. [Downloadable!]
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  21. Mizen, Paul & Pentecost, Eric J, 1994. "Evaluating the Empirical Evidence for Currency Substitution: A Case Study of the Demand for Sterling in Europe," Economic Journal, Royal Economic Society, vol. 104(426), pages 1057-69, September. [Downloadable!] (restricted)
  22. Paul R. Krugman, 1984. "The International Role of the Dollar: Theory and Prospect," NBER Chapters, in: Exchange Rate Theory and Practice, pages 261-278 National Bureau of Economic Research, Inc. [Downloadable!]
  23. Eduardo Levy Yeyati, 2006. "Financial dollarization: evaluating the consequences," Economic Policy, CEPR, CES, MSH, vol. 21(45), pages 61-118, 01. [Downloadable!] (restricted)
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  24. 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. [Downloadable!] (restricted)
  25. Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June. [Downloadable!] (restricted)
  26. Thomas, Lee R, 1985. "Portfolio Theory and Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 347-57, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!]
    Other versions:
  2. Miguel Lebre de Freitas, 2006. "Currency Substitution and Money Demand in Euroland," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(3), pages 275-287, September. [Downloadable!] (restricted)
    Other versions:
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