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On the Relation between Money and Derivatives and its Application to the International Monetary Market

  • Paolo Savona

    ()

  • Aurelio Maccario

    ()

The paper deals with the problem of defining money in a system with derivatives. We conclude that derivatives have to be included in the definition of money, and support our conclusions with an econometric test on the New York Stock Exchange (NYSE) and Chicago Board of Trade indexes. We focus on the direct relationship between derivatives' supply and the interest rate, the analytical basis of speculative money demand introduced by Keynes and the foundation of the Fratianni-Savona model to single out the international monetary base. Consequently, monetary aggregates measured by international institutions, such as the Bank for International Settlements, underestimate the actual offshore market size. Derivatives are the primary instruments used by speculators. There is money, mainly in reserve currencies, that is not controlled and that may cause systemic instability (e.g., the recent Asian crisis). Copyright Kluwer Academic Publishers 1998

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File URL: http://hdl.handle.net/10.1023/A:1008377123134
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 9 (1998)
Issue (Month): 1 (January)
Pages: 637-664

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Handle: RePEc:kap:openec:v:9:y:1998:i:1:p:637-664
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  1. Michele Fratianni & Andreas Hauskrecht & Aurelio Maccario, 1998. "Dominant Currencies and the Future of the Euro," Open Economies Review, Springer, vol. 9(1), pages 467-492, January.
  2. Franklin R. Edwards & Frederic S. Mishkin, 1995. "The decline of traditional banking: implications for financial stability and regulatory policy," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 27-45.
  3. von Hagen, Jürgen & Fender, Ingo, 1998. "Central bank policy in a more perfect financial system," ZEI Working Papers B 03-1998, ZEI - Center for European Integration Studies, University of Bonn.
  4. Barry Eichengreen., 1997. "Exchange Rate Stability and Financial Stability," Center for International and Development Economics Research (CIDER) Working Papers C97-092, University of California at Berkeley.
  5. Forrest Capie, 1998. "Monetary Unions in Historical Perspective: What Future for the Euro in the International Financial System," Open Economies Review, Springer, vol. 9(1), pages 447-466, January.
  6. Louis O. Scott, 1991. "The Information Content of Prices in Derivative Security Markets," IMF Working Papers 91/132, International Monetary Fund.
  7. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
  8. Tomás J. T. Baliño & Charles Enoch & William E. Alexander, 1995. "The Adoption of Indirect Instruments of Monetary Policy," IMF Occasional Papers 126, International Monetary Fund.
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