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Money demand stability under currency substitution: some recent evidence

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  • Santi Chaisrisawatsuk
  • Subhash Sharma
  • Abdur Chowdhury

Abstract

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.

Suggested Citation

  • Santi Chaisrisawatsuk & Subhash Sharma & Abdur Chowdhury, 2004. "Money demand stability under currency substitution: some recent evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 14(1), pages 19-27.
  • Handle: RePEc:taf:apfiec:v:14:y:2004:i:1:p:19-27
    DOI: 10.1080/0960310042000164194
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    References listed on IDEAS

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    1. 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 1057-1072, June.
    2. 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.
    3. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
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    5. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
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    Cited by:

    1. Marco Airaudo & Edward F Buffie & Luis-Felipe Zanna, 2016. "Inflation Targeting and Exchange Rate Management In Less Developed Countries," IMF Working Papers 16/55, International Monetary Fund.
    2. Ahmad Baharumshah & Siew-Voon Soon, 2015. "Demand for broad money in Singapore: does wealth matter?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 557-573, July.
    3. Chin-Hong, Puah & Lee-Chea, Hiew, 2010. "Financial Liberalization, Weighted Monetary Aggregates and Money Demand in Indonesia," MPRA Paper 31731, University Library of Munich, Germany.
    4. Kyophilavong, Phouphet & Shahbaz, Muhammad & Uddin, Gazi Salah, 2013. "Does J-curve phenomenon exist in case of Laos? An ARDL approach," Economic Modelling, Elsevier, vol. 35(C), pages 833-839.
    5. Folarin, Oludele & Asongu, Simplice, 2017. "Financial liberalization and long-run stability of money demand in Nigeria," MPRA Paper 81190, University Library of Munich, Germany.
    6. Samreth, Sovannroeun, 2008. "Estimating Money Demand Function in Cambodia: ARDL Approach," MPRA Paper 16274, University Library of Munich, Germany, revised Jun 2009.
    7. Narayan, Paresh Kumar, 2007. "Is money targeting an option for Bank Indonesia?," Journal of Asian Economics, Elsevier, vol. 18(5), pages 726-738, October.
    8. Dahalan, Jauhari & Sharma, Subhash C. & Sylwester, Kevin, 2007. "Scale variable specification in a money demand function for Malaysia," Journal of Asian Economics, Elsevier, vol. 18(6), pages 867-882, December.
    9. Akhand Akhtar Hossain, 2015. "The Evolution of Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 14611, June.
    10. Shahbaz, Muhammad & Arouri, Mohamed & Teulon, Frédéric, 2014. "Short- and long-run relationships between natural gas consumption and economic growth: Evidence from Pakistan," Economic Modelling, Elsevier, vol. 41(C), pages 219-226.
    11. P K Narayan & S Narayan, 2008. "Estimating the Demand for Money in an Unstable Open Economy: The Case of the Fiji Islands," Economic Issues Journal Articles, Economic Issues, vol. 13(1), pages 71-91, March.
    12. repec:eee:jimfin:v:81:y:2018:i:c:p:159-184 is not listed on IDEAS

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