Currency Substitution, Portfolio Diversification and Money Demand
AbstractThe paper explores the implications of means of payment substitutability and capital mobility on the properties of the money demand, using the Thomas (1985) stochastic dynamic optimising model, where the specific role of money is explicitly accounted for. Extending the model to a case in which the consumer has no access to bonds denominated in foreign currency, we are able to describe the double role (means of payment and store of value) that foreign bank notes may have in countries where asset markets are illiquid. We show that means of payment substitutability opens a channel through which portfolio decisions influence the demand for domestic money, even if the later is dominated as store of value. Contrary to what suggested by the Portfolio Balance Theory of Currency Substitution (Cuddington, 1983), the results obtained in this paper suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the presence of CS
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 263.
Date of creation: 11 Aug 2004
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Money Demand; Currency Substitution; Dollarisation; Portfolio Choice.;
Other versions of this item:
- Miguel Lebre de Freitas & Francisco José Veiga, 2006. "Currency substitution, portfolio diversification, and money demand," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 719-743, August.
- Miguel Lebre de Freitas, 2004. "Currency Substitution, portfolio Diversification and Money Demand," NIPE Working Papers 9/2004, NIPE - Universidade do Minho.
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-10-30 (All new papers)
- NEP-CBA-2004-10-30 (Central Banking)
- NEP-FIN-2004-10-30 (Finance)
- NEP-IFN-2004-10-30 (International Finance)
- NEP-MON-2004-10-30 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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