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Money demand stability under currency substitution: some recent evidence

  • Santi Chaisrisawatsuk
  • Subhash Sharma
  • Abdur Chowdhury

This study deals with the issue of independent monetary policy and the stability of the domestic money demand function in the presence of currency substitution and capital mobility in five Asian economies. It is argued that money demand will be less stable and more difficult to control in the presence of international variables. The money demand function is derived using the portfolio balance approach. The results from the cointegration analysis reveal that capital mobility and currency substitution are significant factors in the domestic money demand equations for Indonesia, Korea, Malaysia, Singapore, and Thailand. The results also show that the US dollar, Japanese yen, and British pound are used significantly by domestic residents together with the domestic currency in Indonesia, Korea, Singapore and Thailand. However, in the case of Malaysia, despite the existence of currency substitution for the US dollar and Japanese yen, there is no evidence of currency substitution between the domestic currency and British pound. Therefore, for these countries to have an effective monetary policy, the monetary authorities should take into account the two international factors.

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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 1 ()
Pages: 19-27

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Handle: RePEc:taf:apfiec:v:14:y:2004:i:1:p:19-27
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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. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
  3. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  4. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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