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Currency Substitution and the Stability of the Demand for Money in East Asia

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  • Olugbenga Onafowora
  • Oluwole Owoye
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    Abstract

    This paper models and tests the stability of the demand for money in five East Asian countries—Indonesia, Malaysia, Philippines, Singapore, and Thailand—in the context of an open economy. The Johansen multivariate cointegration vector error correction analysis against quarterly data covering the period 1985:1-2001:4 was used. It was found that a stationary long run cointegrating relationship exists between broad money, real income, domestic interest rates, foreign interest rates corrected for exchange rate depreciation, and the expected rate of depreciation of the exchange rate. The results show that US Treasury bills rates and the foreign exchange rate vis-a-vis the US dollar play a significant role in the East Asian countries money demand relationship. This suggests that currency substitution vis-a-vis the US dollar may be an important consideration in the design and implementation of monetary policy in the East Asian countries. Furthermore, the results show that the Asian currency crises impacted the money demand functions negatively in these countries. CUSUM and CUSUMSQ stability tests show no evidence of parameter instability of the money demand functions in three of the five countries throughout the period under investigation.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Global Economic Review.

    Volume (Year): 34 (2005)
    Issue (Month): 2 ()
    Pages: 233-259

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    Handle: RePEc:taf:glecrv:v:34:y:2005:i:2:p:233-259

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    Related research

    Keywords: East Asia; money demand; currency substitution; cointegration; CUSUM stability test; CUSUMSQ stability test;

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    Cited by:
    1. Yu Hsing, 2012. "Impacts of Macroeconomic Forces and External Shocks on Real Output for Indonesia," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 42(1), pages 97-104, March.

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