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Currency Substitution under Nonexpected Utility: Some Empirical Evidence

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  • Bufman, Gil
  • Leiderman, Leonardo
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    Abstract

    This paper derives and tests the restrictions implied by an optimizing model of currency substitution under nonexpected utility using quarterly data for Israel from 1978 to 1988. We find that the elasticity of intertemporal substitution is less than one, the elasticity of currency substitution is greater than one, relative risk aversion is about seven, and the elasticity of currency substitution is greater than the intratemporal elasticity of substitution between consumption and liquidity services. In most cases the evidence supports the hypothesis of nonexpected utility as well as the inclusion of liquidity services in the representative agent's objective function. The methodology of this paper can be applied to other interesting cases of currency substitution. Copyright 1993 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): 25 (1993)
    Issue (Month): 3 (August)
    Pages: 320-35

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    Handle: RePEc:mcb:jmoncb:v:25:y:1993:i:3:p:320-35

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

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    Cited by:
    1. Kari Heimonen, 2006. "The Dynamics of Currency Substitution: Evidence from UK Foreign Currency Balances," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(1), pages 61-74, April.
    2. Sharma, Subhash C. & Kandil, Magda & Chaisrisawatsuk, Santi, 2005. "Currency substitution in Asian countries," Journal of Asian Economics, Elsevier, vol. 16(3), pages 489-532, June.
    3. Tsang, Shu-ki & Ma, Yue, 2002. "Currency substitution and speculative attacks on a currency board system," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 53-78, February.
    4. Uribe, Martin, 1999. "Comparing the welfare costs and initial dynamics of alternative inflation stabilization policies," Journal of Development Economics, Elsevier, vol. 59(2), pages 295-318, August.
    5. Nombulelo Duma, 2011. "Dollarization in Cambodia: Causes and Policy Implications," IMF Working Papers 11/49, International Monetary Fund.
    6. Sahay, Ratna & Vegh, Carlos, 1995. "Dollarization in transition economies: Evidence and policy implications," MPRA Paper 20490, University Library of Munich, Germany.
    7. Sen, Amit, 1999. "Approximate p-values of predictive tests for structural stability," Economics Letters, Elsevier, vol. 63(3), pages 245-253, June.

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