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The demand for money in a small open economy: The case of Switzerland

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  • Abdur Chowdhury

Abstract

The paper uses cointegration analysis to investigate the demand for money in Switzerland in the context of an open economy. It considers the general process of financial asset substitution and tests for the relevance of an exchange rate and a foreign interest rate variable in a conventional money demand equation. The results show that the variables entering into the demand for either monetary base or narrow money equation may not form a cointegrated system unless the exchange rate or foreign interest rate variable is included. This provides support to both the currency substitution and capital mobility hypotheses. Copyright Kluwer Academic Publishers 1995

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File URL: http://hdl.handle.net/10.1007/BF01001233
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 6 (1995)
Issue (Month): 2 (April)
Pages: 131-144

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Handle: RePEc:kap:openec:v:6:y:1995:i:2:p:131-144

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: money demand; open economy; cointegration;

References

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  1. McKinnon, Ronald I, 1982. "Currency Substitution and Instability in the World Dollar Standard," American Economic Review, American Economic Association, vol. 72(3), pages 320-33, June.
  2. Rich, Georg, 1990. "Exchange-rate management under floating exchange rates : A skeptical Swiss view," Journal of Banking & Finance, Elsevier, vol. 14(5), pages 993-1021, November.
  3. Andreas M. Fischer & Michel Peytrignet, 1990. "Are Larger Monetary Aggregates Interesting? Some Exploratory Evidence for Switzerland Using Feedback Models," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 126(IV), pages 505-520, December.
  4. Hafer, R.W. & Jansen, D.W., 1990. "The Demand For Money In The United States: Evidence From Cointegration Tests," Papers 9010, Erasmus University of Rotterdam - Institute for Economic Research.
  5. Erwin W. Heri, 1988. "Money Demand Regressions and Monetary Targeting Theory and Stylized Evidence," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 124(II), pages 123-149, June.
  6. McKenzie, C. R., 1992. "Money demand in an open economy," Journal of the Japanese and International Economies, Elsevier, vol. 6(2), pages 176-198, June.
  7. Neil R. Ericsson, 1991. "Cointegration, exogeneity, and policy analysis: an overview," International Finance Discussion Papers 415, Board of Governors of the Federal Reserve System (U.S.).
  8. Ben Bernanke & Frederic Mishkin, 1993. "Central Bank Behavior and the Strategy of Monetary Policy: Observations From Six Industrialized Countries," NBER Working Papers 4082, National Bureau of Economic Research, Inc.
  9. Fischer, Andreas M & Peytrignet, Michel, 1991. "The Lucas Critique in Light of Swiss Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(4), pages 481-93, November.
  10. Ulrich Kohli & Georg Rich, 1986. "Monetary Control: The Swiss Experience," Cato Journal, Cato Journal, Cato Institute, vol. 5(3), pages 911-926, Winter.
  11. DeJong, David N. & Whiteman, Charles H., 1991. "Reconsidering 'trends and random walks in macroeconomic time series'," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 221-254, October.
  12. David F. Hendry & Neil R. Ericsson, 1989. "An econometric analysis of UK money demand in MONETARY TRENDS IN THE UNITED STATES AND THE UNITED KINGDOM by Milton Friedman and Anna J. Schwartz," International Finance Discussion Papers 355, Board of Governors of the Federal Reserve System (U.S.).
  13. Francis X. Diebold & Glenn D. Rudebusch, 1990. "On the power of Dickey-Fuller tests against fractional alternatives," Finance and Economics Discussion Series 119, Board of Governors of the Federal Reserve System (U.S.).
  14. Bell, William R & Hillmer, Steven C, 1984. "Issues Involved with the Seasonal Adjustment of Economic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 291-320, October.
  15. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  16. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  17. Piyu Yue & Robert Fluri, 1991. "Divisia monetary services indexes for Switzerland: are they useful for monetary targeting?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 19-33.
  18. Ghysels, E., 1986. "A Study Towards a Dynamic Theory of Seasonality for Economic Time Series," Cahiers de recherche 8612, Universite de Montreal, Departement de sciences economiques.
  19. Tobias F. Rotheli, 1988. "Money demand and inflation in Switzerland: an application of the Pascal technique," Review, Federal Reserve Bank of St. Louis, issue May, pages 43-52.
  20. Fischer, Andreas M, 1993. "Is Money Really Exogenous? Testing for Weak Exogeneity in Swiss Money Demand," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 248-58, May.
  21. Georg Rich, 1987. "Swiss and United States monetary policy: has monetarism failed?," Economic Review, Federal Reserve Bank of Richmond, issue May, pages 3-16.
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Citations

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Cited by:
  1. Abbas Valadkhani, 2008. "Long- and Short-Run Determinants of the Demand for Money in the Asian-Pacific Countries: An Empirical Panel Investigation," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 77-90, May.
  2. Subramanian S. Sriram, 1999. "Survey of Literature on Demand for Money: Theoretical and Empirical Work with Special Reference to Error-Correction Models," IMF Working Papers 99/64, International Monetary Fund.
  3. Abbas Valadkhani, 2003. "Long and Short-Run Determinants of Money Demand in New Zealand: Evidence from Cointegration Analysis," School of Economics and Finance Discussion Papers and Working Papers Series 132, School of Economics and Finance, Queensland University of Technology.
  4. Petra Gerlach-Kristen, 2001. "The Demand for Money in Switzerland 1936-1995," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 137(IV), pages 535-554, December.
  5. Valadkhani, Abbas, 2006. "What Determines the Demand for Money in the Asian-Pacific Countries? An Empirical Panel Investigation," Economics Working Papers wp06-11, School of Economics, University of Wollongong, NSW, Australia.
  6. Abbas Valadkhani & Mohammad Alauddin, 2003. "Demand for M2 in Developing Countries: An Empirical Panel Investigation," School of Economics and Finance Discussion Papers and Working Papers Series 158, School of Economics and Finance, Queensland University of Technology.
  7. Fidrmuc, Jarko, 2006. "Money Demand and Disinflation in Selected CEECs during the Accession to the EU," Discussion Papers in Economics 1232, University of Munich, Department of Economics.
  8. Ozturk, Ilhan & Acaravci, Ali, 2008. "The Demand for Money in Transition Economies," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 5(2), pages 35-43, June.

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