Currency Substitution, portfolio Diversification and Money Demand
AbstractWe extend the Thomas (1985) dynamic optimissing model of money demand and currency substitution to the case in which the individual has no access to bonds denominated in foreign currency. We show that in this case the demand for domestic money is influenced by portfolio decisions. Contrary to what defended by the Portfolio Balance Approach to currency substitution, 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 present of curency substitution. The results also suggest that, in countries facing monetary instability and currency substitution, restricting the availability of interest-bearning assets denominated in foreign currency may have a destabilising impact on the money demand.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 9/2004.
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
Phone: +351-253604510 ext 5532
Web page: http://www3.eeg.uminho.pt/economia/nipe/versao_inglesa/index_uk.htm
More information through EDIRC
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," Econometric Society 2004 Latin American Meetings 263, Econometric Society.
- 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:
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.:
- Lebre de Freitas, M., 2004.
"The dynamics of inflation and currency substitution in a small open economy,"
Journal of International Money and Finance,
Elsevier, vol. 23(1), pages 133-142, February.
- Miguel Lebre de Freitas, 2003. "The dynamics of inflation and currency substitution in a small open economy," Working Papers de Economia (Economics Working Papers) 02, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro, revised Aug 2003.
- Miguel Lebre de Freitas, 2004. "The Dynamics of Inflation and Currency Substitution in a Small Open Economy," NIPE Working Papers 1/2004, NIPE - Universidade do Minho.
- Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416.
- Shi Shougong, 1995.
"Money and Prices: A Model of Search and Bargaining,"
Journal of Economic Theory,
Elsevier, vol. 67(2), pages 467-496, December.
- Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
- Mohsin S. Khan & Pierre-Richard AgÃ©nor, 1992.
"Foreign Currency Deposits and the Demand for Money in Developing Countries,"
IMF Working Papers
92/1, International Monetary Fund.
- Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June.
- Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October.
- Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
- Chang, Roberto, 1994.
"Endogenous Currency Substitution, Inflationary Finance, and Welfare,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 26(4), pages 903-16, November.
- Chang, Roberto, 1989. "Endogenous Currency Substitution, Inflationary Finance, And Welfare," Working Papers 89-12, C.V. Starr Center for Applied Economics, New York University.
- Eduardo Levy-Yeyati, 2004.
"FINANCIAL DOLLARIZATION: Evaluating the consequences,"
Econometric Society 2004 Latin American Meetings
184, Econometric Society.
- Eduardo Levy Yeyati, 2006. "Financial dollarization: evaluating the consequences," Economic Policy, CEPR & CES & MSH, vol. 21(45), pages 61-118, 01.
- Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers findollarisation, Universidad Torcuato Di Tella.
- Pablo E. Guidotti & Carlos A. Rodriguez, 1992.
"Dollarization in Latin America: Gresham's Law in Reverse?,"
IMF Staff Papers,
Palgrave Macmillan, vol. 39(3), pages 518-544, September.
- Pablo Emilio Guidotti & Carlos A. Rodriguez, 1991. "Dollarization in Latin America - Gresham's Law in Reverse?," IMF Working Papers 91/117, International Monetary Fund.
- Pablo Guidotti & Carlos A. Rodríguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," CEMA Working Papers: Serie Documentos de Trabajo. 81, Universidad del CEMA.
- Branson, William H. & Henderson, Dale W., 1985.
"The specification and influence of asset markets,"
Handbook of International Economics,
in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805
- Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
- Imrohoroglu, Selahattin, 1994. "GMM Estimates of Currency Substitution between the Canadian Dollar and the U.S. Dollar," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 792-807, November.
- Smith, Constance E, 1995. "Substitution, Income, and Intertemporal Effects in Currency-Substitution Models," Review of International Economics, Wiley Blackwell, vol. 3(1), pages 53-59, February.
- Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
- Stockman, Alan C, 1980.
"A Theory of Exchange Rate Determination,"
Journal of Political Economy,
University of Chicago Press, vol. 88(4), pages 673-98, August.
- Miles, Marc A, 1978. "Currency Substitution, Flexible Exchange Rates, and Monetary Independence," American Economic Review, American Economic Association, vol. 68(3), pages 428-36, June.
- Paul R. Krugman, 1984. "The International Role of the Dollar: Theory and Prospect," NBER Chapters, in: Exchange Rate Theory and Practice, pages 261-278 National Bureau of Economic Research, Inc.
- Uribe, Martin, 1997.
"Hysteresis in a simple model of currency substitution,"
Journal of Monetary Economics,
Elsevier, vol. 40(1), pages 185-202, September.
- Martin Uribe, 1995. "Hysteresis in a simple model of currency substitution," International Finance Discussion Papers 509, Board of Governors of the Federal Reserve System (U.S.).
- Kamin, Steven B. & Ericsson, Neil R., 2003. "Dollarization in post-hyperinflationary Argentina," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 185-211, April.
- Bergstrand, Jeffrey H. & Bundt, Thomas P., 1990. "Currency substitution and monetary autonomy: the foreign demand for US demand deposits," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 325-334, September.
- Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
- Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
- Thomas, Lee R, 1985. "Portfolio Theory and Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 347-57, August.
- Akcay, O. Cevdet & Alper, C. Emre & Karasulu, Meral, 1997. "Currency substitution and exchange rate instability: The Turkish case," European Economic Review, Elsevier, vol. 41(3-5), pages 827-835, April.
- Mizen, Paul & Pentecost, Eric J, 1994. "Evaluating the Empirical Evidence for Currency Substitution: A Case Study of the Demand for Sterling in Europe," Economic Journal, Royal Economic Society, vol. 104(426), pages 1057-69, September.
- Ratti, Ronald A & Jeong, Byung Woo, 1994. "Variation in the real exchange rate as a source of currency substitution," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 537-550, October.
- Caroline Duburcq & Eric Girardin, 2010. "Domestic and external factors in interest rate determination: the minor role of the exchange rate regime," Economics Bulletin, AccessEcon, vol. 30(1), pages 624-635.
- repec:ebl:ecbull:v:30:y:2010:i:1:p:624-635 is not listed on IDEAS
- Ingrid Größl & Ulrich Fritsche, 2007.
"The Store-of-Value-Function of Money as a Component of Household Risk Management,"
Discussion Papers of DIW Berlin
660, DIW Berlin, German Institute for Economic Research.
- Ingrid Groessl & Ulrich Fritsche, 2006. "The Store-of-Value-Function of Money as a Component of Household Risk Management," Macroeconomics and Finance Series 200606, Hamburg University, Department Wirtschaft und Politik.
- Miguel Lebre de Freitas, 2006.
"Currency Substitution and Money Demand in Euroland,"
Atlantic Economic Journal,
International Atlantic Economic Society, vol. 34(3), pages 275-287, September.
- Miguel Lebre de Freitas, 2003. "Currency substitution and money demand in Euroland," NIPE Working Papers 11/2003, NIPE - Universidade do Minho.
- repec:cbk:journl:v:1:y:2013:i:3:p:139-155 is not listed on IDEAS
- Caroline Duburcq, 2010. "The Impact of Exchange Rate Regime on Interest Rates in Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 47(135), pages 91-124.
- Ivan Milenković & Milivoje Davidović, 2013. "Determinants of Currency Substitution/Dollarization – The Case of the Republic of Serbia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(1), pages 139-155.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria João Thompson).
If references are entirely missing, you can add them using this form.