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"Here, dollars, dollars ..."estimating currency demand and worldwide currency substitution

  • Brian M. Doyle

In measuring the percentage of foreign-held U.S., German, and Swiss currencies for the period of the 1960s through the 1990s, I obtain estimates much different from those of others. Using currency demand equations implied by cointegrating vectors for Canada, the Netherlands, and Austria, I estimate that in 1996 only 30% of U.S. currency was held outside the United States, and as much as 69% of German currency was held outside Germany. The U.S. estimate falls slowly over the 1960s, reaching a low of 5% in the first half of the 1970s, then rises through the early 1980s and again during the 1990s. Given that foreign holdings of the U.S., German, and Swiss currencies constitute the bulk of international currency substitution in the world, I find that, adjusted for inflation, currency substitution roughly tripled from 1986 to 1996.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 657.

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Date of creation: 2000
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Handle: RePEc:fip:fedgif:657
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  1. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  2. Lucas, R.F. & Haug, A.A., 1992. "Long-Run Money Demand in Canada: In Search of Stability," Papers 92-4, Saskatchewan - Department of Economics.
  3. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  4. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
  5. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
  6. Haughton, Jonathan, 1995. "Adding mystery to the case of the missing currency," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(35), pages 595-602.
  7. Edgar L. Feige, 2005. "The Underground Economy And The Currency Enigma," Macroeconomics 0502004, EconWPA.
  8. Richard D. Porter & Ruth A. Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
  9. Miguel A. Savastano, 1996. "Dollarization in Latin America; Recent Evidence and Some Policy Issues," IMF Working Papers 96/4, International Monetary Fund.
  10. Case M. Sprenkle, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-184, Fall.
  11. Steven B. Kamin & Neil R. Ericsson, 1993. "Dollarization in Argentina," International Finance Discussion Papers 460, Board of Governors of the Federal Reserve System (U.S.).
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