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Exchange rate volatility and demand for money in less developed countries

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  • Sahar Bahmani

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Abstract

One implication of currency substitution is that the exchange rate could serve as another determinant of the demand for money. Indeed, many studies have justified this empirically for the majority of countries. If the exchange rate serves as a determinant of the demand for money, exchange rate volatility could also influence money demand. By using annual data from 15 less developed countries and the bounds testing approach, we show that exchange rate volatility has short-run effects on the demand for real M2 monetary aggregate in LDCs. However, in most countries, short-run effects are not sustained. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Sahar Bahmani, 2013. "Exchange rate volatility and demand for money in less developed countries," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(3), pages 442-452, July.
  • Handle: RePEc:spr:jecfin:v:37:y:2013:i:3:p:442-452
    DOI: 10.1007/s12197-011-9190-y
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    References listed on IDEAS

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    1. 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.
    2. Thomas Willett & Edward Tower, 1970. "Currency areas and exchange-rate flexibility," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 105(1), pages 48-65, September.
    3. Marquez, Jaime, 1987. "Money demand in open economies: A currency substitution model for Venezuela," Journal of International Money and Finance, Elsevier, vol. 6(2), pages 167-178, June.
    4. Sidney S. Alexander, 1952. "Effects of a Devaluation on a Trade Balance," IMF Staff Papers, Palgrave Macmillan, vol. 2(2), pages 263-278, April.
    5. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    6. Cuddington, John T. & Cuddington, John T., 1983. "Currency substitution, capital mobility and money demand," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 111-133, August.
    7. Holden, Paul & Holden, Merle & Suss, Esther C, 1979. "The Determinants of Exchange Rate Flexibility: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 327-333, August.
    8. Arango, Sebastian & Ishaq Nadiri, M., 1981. "Demand for money in open economies," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 69-83.
    9. Mcgibany, James M. & Nourzad, Farrokh, 1995. "Exchange rate volatility and the demand for money in the U.S," International Review of Economics & Finance, Elsevier, vol. 4(4), pages 411-425.
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    Cited by:

    1. Vittorio Daniele & Pasquale Foresti & Oreste Napolitano, 2017. "The stability of money demand in the long-run: Italy 1861–2011," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 11(2), pages 217-244, May.
    2. repec:spr:jecfin:v:41:y:2017:i:2:d:10.1007_s12197-016-9358-6 is not listed on IDEAS
    3. repec:beo:journl:v:62:y:2017:i:213:p:45-66 is not listed on IDEAS

    More about this item

    Keywords

    Money Demand; Exchange Rate Volatility; Bounds Testing; Less Developed Countries; E41; F30;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F30 - International Economics - - International Finance - - - General

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