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Semi-Nonparametric Estimates of Currency Substitution Between the Canadian Dollar and the U.S. Dollar

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Author Info
Apostolos Serletis
Guohua Feng

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Abstract

In this paper we investigate the issue of whether a floating currency is the right exchange rate regime for Canada or whether Canada should consider a currency union with the United States. In the context of the framework recently proposed by Swofford (2000, 2005), we use a semi-nonparametric fexible functional form - the Asymptotically Ideal Model (AIM), introduced by Barnett and Jonas (1983) - and pay explicit attention to the theoretical regularity conditions of neoclassical microeconomic theory, following the suggestions by Bar- nett (2002) and Barnett and Pasupathy (2003). Our results indicate that U.S. dollar deposits are complements to domestic (Canadian) monetary assets, suggesting that Canada should continue the current exchange rate regime, allowing the exchange rate to float freely with no intervention in the foreign exchange market by the Bank of Canada.

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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2008-32.

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Date of creation: 27 Oct 2008
Date of revision: 27 Oct 2008
Handle: RePEc:clg:wpaper:2008-32

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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    Other versions:
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    Other versions:
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    Other versions:
  17. Canzoneri, Matthew B & Rogers, Carol Ann, 1990. "Is the European Community an Optimal Currency Area? Optimal Taxation versus the Cost of Multiple Currencies," American Economic Review, American Economic Association, vol. 80(3), pages 419-33, June. [Downloadable!] (restricted)
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    Other versions:
  24. Klein, Benjamin, 1974. "Competitive Interest Payments on Bank Deposits and the Long-Run Demand for Money," American Economic Review, American Economic Association, vol. 64(6), pages 931-49, December. [Downloadable!] (restricted)
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    Other versions:
  30. Fisher, Douglas & Fleissig, Adrian R, 1997. "Monetary Aggregation and the Demand for Assets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 458-75, November.
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