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Currency Substitution under Nonexpected Utility: Some Empirical Evidence

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  • Bufman, Gil
  • Leiderman, Leonardo

Abstract

This paper derives and tests the restrictions implied by an optimizing model of currency substitution under nonexpected utility using quarterly data for Israel from 1978 to 1988. We find that the elasticity of intertemporal substitution is less than one, the elasticity of currency substitution is greater than one, relative risk aversion is about seven, and the elasticity of currency substitution is greater than the intratemporal elasticity of substitution between consumption and liquidity services. In most cases the evidence supports the hypothesis of nonexpected utility as well as the inclusion of liquidity services in the representative agent's objective function. The methodology of this paper can be applied to other interesting cases of currency substitution. Copyright 1993 by Ohio State University Press.

Suggested Citation

  • Bufman, Gil & Leiderman, Leonardo, 1993. "Currency Substitution under Nonexpected Utility: Some Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 320-335, August.
  • Handle: RePEc:mcb:jmoncb:v:25:y:1993:i:3:p:320-35
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    Cited by:

    1. Tsang, Shu-ki & Ma, Yue, 2002. "Currency substitution and speculative attacks on a currency board system," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 53-78, February.
    2. Uribe, Martin, 1999. "Comparing the welfare costs and initial dynamics of alternative inflation stabilization policies," Journal of Development Economics, Elsevier, vol. 59(2), pages 295-318, August.
    3. Carlos A. VĂ©gh Gramont & Ratna Sahay, 1995. "Dollarization in Transition Economies; Evidence and Policy Implications," IMF Working Papers 95/96, International Monetary Fund.
    4. Isakova, Asel, 2010. "Currency substitution in the economies of Central Asia : how much does it cost?," BOFIT Discussion Papers 14/2010, Bank of Finland, Institute for Economies in Transition.
    5. Sharma, Subhash C. & Kandil, Magda & Chaisrisawatsuk, Santi, 2005. "Currency substitution in Asian countries," Journal of Asian Economics, Elsevier, vol. 16(3), pages 489-532, June.
    6. Olga Loiseau-Aslanidi, 2012. "Dollarization in Emerging Markets: Evidence from Georgia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(3), pages 70-84, May.
    7. Sen, Amit, 1999. "Approximate p-values of predictive tests for structural stability," Economics Letters, Elsevier, vol. 63(3), pages 245-253, June.
    8. Nombulelo Braiton, 2011. "Dollarization in Cambodia; Causes and Policy Implications," IMF Working Papers 11/49, International Monetary Fund.
    9. Asel Isakova, 2010. "Currency Substitution in the Economies of Central Asia: How Much Does it Cost?," Chapters,in: The Euro and Economic Stability, chapter 9 Edward Elgar Publishing.
    10. Piontkovsky Ruslan, 2003. "Dollarization, Inflation Volatility and Underdeveloped Financial Markets in Transition Economies," EERC Working Paper Series 03-02e, EERC Research Network, Russia and CIS.
    11. Olga Loiseau-Aslanidi, 2012. "Dollarization in Emerging Markets: Evidence from Georgia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(3), pages 70-84, May.
    12. Heimonen, Kari, 2001. "Substituting a substitute currency : The case of Estonia," BOFIT Discussion Papers 11/2001, Bank of Finland, Institute for Economies in Transition.
    13. Martin Uribe, 1996. "Comparing the welfare costs and the initial dynamics of alternative temporary stabilization policies," International Finance Discussion Papers 539, Board of Governors of the Federal Reserve System (U.S.).
    14. Jose Martelino & S. Nuri Erbas & Adnan Mazarei & Sena Eken & Paul Cashin, 1995. "Economic Dislocation and Recovery in Lebanon," IMF Occasional Papers 120, International Monetary Fund.
    15. Kari Heimonen, 2006. "The Dynamics of Currency Substitution: Evidence from UK Foreign Currency Balances," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(1), pages 61-74, April.
    16. Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS.

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