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The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries

Author

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  • Claudiu Tiberiu Albulescu

    (UPT - Politehnica University of Timisoara)

  • Dominique Pépin

    (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)

  • Stephen Miller

    () (WGU Nevada - University of Nevada [Las Vegas])

Abstract

This paper investigates and compares currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro. In addition, we develop a model with microeconomic foundations, which identifies difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to money demand sensitivity to the interest rate spread between the CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand, even absent a currency substitution effect. This model applies to any country where an international currency offers liquidity services to domestic agents. The model generates empirical tests of long-run money demand using two complementary cointegrating equations. The opportunity cost of holding the money and the scale variable, either household consumption or output, explain the long-run money demand in CEE countries.

Suggested Citation

  • Claudiu Tiberiu Albulescu & Dominique Pépin & Stephen Miller, 2019. "The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries," Post-Print hal-01348842, HAL.
  • Handle: RePEc:hal:journl:hal-01348842
    DOI: 10.1016/j.jmacro.2019.01.002
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01348842v3
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    References listed on IDEAS

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    Cited by:

    1. Claudiu Tiberiu Albulescu & Dominique Pépin, 2018. "Money demand stability, monetary overhang and inflation forecast in the CEE countries," Working Papers hal-01720319, HAL.
    2. ALBULESCU, Claudiu Tiberiu & Pepin, Dominique, 2018. "Monetary Integration, Money-Demand Stability, and the Role of Monetary Overhang in Forecasting Inflation in CEE Countries," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 33(4), pages 841-879.

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    More about this item

    Keywords

    currency substitution; cointegration; money demand; open economy model; CEE countries;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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