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GMM Estimates of Currency Substitution between the Canadian Dollar and the U.S. Dollar


  • Imrohoroglu, Selahattin


This paper investigates the empirical strength of currency substitution between the Canadian dollar and the U.S. dollar. Euler equations implied by a small, open economy, money-in-the-utility-function model are estimated and tested by Hansen's generalized method of moments procedure. The major empirical finding is that both the elasticity of currency substitution and the share of U.S. currency in the production of Canadian liquidity services are economically small even though the combined domestic and U.S. real balances appear to provide statistically significant economizing on transactions costs. Copyright 1994 by Ohio State University Press.

Suggested Citation

  • 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.
  • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:4:p:792-807

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    References listed on IDEAS

    1. Polemarchakis, H. M. & Weiss, L., 1977. "On the desirability of a "totally random" monetary policy," Journal of Economic Theory, Elsevier, vol. 15(2), pages 345-350, August.
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    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    4. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
    5. Lucas, Robert Jr., 1977. "Reply to muench and polemarchakis and weiss," Journal of Economic Theory, Elsevier, vol. 15(2), pages 351-352, August.
    6. Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, vol. 73(5), pages 1080-1091, December.
    7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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    Cited by:

    1. Olga Aslanidi, 2008. "Dollarization in Transition Economies: New Evidence from Georgia," CERGE-EI Working Papers wp366, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. 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.
    3. Marco Airaudo & Luis-Felipe Zanna, 2004. "Endogenous Fluctuations in Open Economies: the Perils of Taylor Rules Revisited," Econometric Society 2004 Latin American Meetings 80, Econometric Society.
    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. 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.
    6. Selcuk, Faruk, 2003. "Currency substitution: new evidence from emerging economies," Economics Letters, Elsevier, vol. 78(2), pages 219-224, February.
    7. Georgy Idrisov & Lev Freinkman, 2009. "Modeling the Currency Structure of Bank Deposits: Does the Ratchet Effect Matter?," Working Papers 0005, Gaidar Institute for Economic Policy, revised 2009.
    8. 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.
    9. 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.
    10. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September.
    11. Harrison, Barry & Vymyatnina, Yulia, 2007. "Currency substitution in a de-dollarizing economy : the case of Russia," BOFIT Discussion Papers 3/2007, Bank of Finland, Institute for Economies in Transition.
    12. Huseynov, Salman & Ahmadov, Vugar, 2012. "Currency substitution in an oil-rich CIS country: The case of Azerbaijan," MPRA Paper 70701, University Library of Munich, Germany.
    13. 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.
    14. Heimonen, Kari, 2001. "Substituting a substitute currency : The case of Estonia," BOFIT Discussion Papers 11/2001, Bank of Finland, Institute for Economies in Transition.
    15. Travis D. Nesmith, 2005. "Solving stochastic money-in-the-utility-function models," Finance and Economics Discussion Series 2005-52, Board of Governors of the Federal Reserve System (U.S.).
    16. 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.
    17. 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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