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Tests of the functional form, the substitution effect, and the wealth effect of Mexico´s money demand function


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  • Yu Hsing


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    M1, M2, and M3 demands in Mexico are positively influenced by output and stock prices and negatively associated with the saving rate, the U.S. interest rate, and the expected inflation rate. Peso depreciation affects M1 demand negatively and M2 and M3 demands positively. The log-linear form cannot be rejected for M1 demand and can be rejected for M2 and M3 demands, while the linear form can be rejected for M1, M2, and M3 demands. The CUSUMSQ test shows that M1, M2, and M3 demands are stable; while the CUSUM test indicates stability in M1 and M3 demands and instability in M2 demand.

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    Volume (Year): (2007)
    Issue (Month): ()

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    Handle: RePEc:col:000151:004255

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    Keywords: Box-Cox transformation; currency substitution; wealth effect; stability tests;

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    1. Marquez, Jaime, 1987. "Money demand in open economies: A currency substitution model for Venezuela," Journal of International Money and Finance, Elsevier, Elsevier, vol. 6(2), pages 167-178, June.
    2. Mehra, Yash P, 1993. "The Stability of the M2 Demand Function: Evidence from an Error-Correction Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(3), pages 455-60, August.
    3. John Thornton, 1996. "Cointegration, error correction, and the demand for money in Mexico," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 132(4), pages 690-699, December.
    4. David H. Small & Richard D. Porter, 1989. "Understanding the behavior of M2 and V2," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 244-254.
    5. McKinnon, Ronald I, 1982. "Currency Substitution and Instability in the World Dollar Standard," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 320-33, June.
    6. Prock, Jerry & Soydemir, Gokce A. & Abugri, Benjamin A., 2003. "Currency substitution: Evidence from Latin America," Journal of Policy Modeling, Elsevier, Elsevier, vol. 25(4), pages 415-430, June.
    7. Taylor, Mark P, 1990. "The Hyperinflation Model of Money Demand Revisited," CEPR Discussion Papers, C.E.P.R. Discussion Papers 473, C.E.P.R. Discussion Papers.
    8. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 14, Cowles Foundation for Research in Economics, Yale University.
    9. Rogers, J.H., 1990. "The Currency Substitution Hypothesis And Relative Money Demand In Mexico And Canada," Papers, Pennsylvania State - Department of Economics 7-90-1, Pennsylvania State - Department of Economics.
    10. Yash P. Mehra, 1997. "A review of the recent behavior of M2 demand," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 27-44.
    11. Miriam Chau RodrIGuez & Paul Turner, 2003. "Currency substitution and the demand for money in Mexico," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(1), pages 59-62.
    12. Phylaktis, Kate & Taylor, Mark P, 1993. "Money Demand, the Cagan Model and the Inflation Tax: Some Latin American Evidence," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 75(1), pages 32-37, February.
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