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The Currency Substitution Hypothesis and Relative Money Demand in Mexico and Canada

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  • Rogers, John H

Abstract

The author estimates demand for dollars relative to domestic currency in Mexico and Canada using (1) a multivariate model with a relative money demand equation, and (2) single- equation models, including an error-correction representation. He also analyzes the models' encompassing properties. The anomalous correlation between the Mexican dollarization ratio and expected peso depreciation implies that "convertibility risk" was associated with holding Mexidollars. Under this interpretation, higher expected depreciation coincides with a drop in relative demand for dollars because there is the possibility that the government will forcibly convert Mexdollars when these central bank liabilities rise and foreign reserves run low. Several testable alternative explanations are rejected. Copyright 1992 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 24 (1992)
Issue (Month): 3 (August)
Pages: 300-318

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Handle: RePEc:mcb:jmoncb:v:24:y:1992:i:3:p:300-318

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Miguel Lebre de Freitas, 2003. "Revisiting Dollarisation Hysteresis: Evidence from Bolivia, Turkey and Indonesia," NIPE Working Papers 12/2003, NIPE - Universidade do Minho.
  2. Alejandro Reynoso, 2002. "Using Signal Processing Tools for Regulation Analysis and Implementation," Working Papers 0203, Centro de Investigacion Economica, ITAM.
  3. Yu Hsing, 2007. "Tests of the functional form, the substitution effect, and the wealth effect of Mexico´s money demand function," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
  4. William C. Gruben & John H. Welch, 1993. "Default risk, dollarization, and currency substitution in Mexico," Research Paper 9313, Federal Reserve Bank of Dallas.
  5. Rogers, John H. & Wang, Ping, 1995. "Output, inflation, and stabilization in a small open economy: Evidence from Mexico," Journal of Development Economics, Elsevier, vol. 46(2), pages 271-293, April.
  6. Fullerton, Thomas M., Jr. & Molina, Angel L., Jr. & Pisani, Michael J., 2009. "Peso Acceptance Patterns in El Paso," MPRA Paper 17900, University Library of Munich, Germany, revised 19 Jun 2009.
  7. John H. Rogers, 1995. "Convertibility risk, default risk, and the Mexdollar anomaly," International Finance Discussion Papers 495, Board of Governors of the Federal Reserve System (U.S.).

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