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Exchange rate changes and money demand in Albania: a nonlinear ARDL analysis

Author

Listed:
  • Mohsen Bahmani-Oskooee

    () (University of Wisconsin – Milwaukee)

  • Ilir Miteza

    () (University of Michigan – Dearborn)

  • Altin Tanku

    () (Bank of Albania)

Abstract

A good part of the empirical literature on money demand focuses on searching for a stable long-run money demand function, an essential part of a successful monetary policy. Beyond the typical money demand specification, which includes income and interest rates, Mundell (Can J Econ Polit Sci 29:475–485, 1963) made a case for the exchange rate as an important determinant of money demand working through currency substitution. This paper contributes a new approach to test the short- and long-run effects of currency fluctuations on money demand in Albania, a small open economy without deep financial markets. More specifically, we examine the case for asymmetric effects of exchange rate fluctuations on money demand by using a nonlinear adjustment mechanism within an ARDL model. Using data for 1996–2016 from Albania, we show that the money demand is stable in both the linear and nonlinear specifications. The nonlinear model reveals an asymmetric effect of exchange rates on money demand, with depreciations reducing money demand, likely due to a substitution effect amplified by a relatively dollarized economy.

Suggested Citation

  • Mohsen Bahmani-Oskooee & Ilir Miteza & Altin Tanku, 2020. "Exchange rate changes and money demand in Albania: a nonlinear ARDL analysis," Economic Change and Restructuring, Springer, vol. 53(4), pages 619-633, November.
  • Handle: RePEc:kap:ecopln:v:53:y:2020:i:4:d:10.1007_s10644-019-09261-9
    DOI: 10.1007/s10644-019-09261-9
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Money demand; Exchange rate; Currency substitution; Nonlinear ARDL; Asymmetric effects;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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