International Shifts in the demand for money in a small monetarist model
At the latest since 1978, international shifts in the demand for money have widely been recognized as a major problem for monetary-policy making under flexible exchange rates. To the extent that such shifts are unpredictable, the case for monetary preannouncement is weakened (Giersch, 1977; Girton, Roper, 1978; Sachverständigenrat, 1978/9; Vaubel, 1980). To the extent that they are unidentifiable once they occur, the case for flexible exchange rates is weakened (Giersch, 1977; King et al., 1977; Sachverständigenrat, 1978/9; Vaubel, 1980). Empirical identification of international shifts in the demand for money (or, what is the same, of currency substitution in demand) has been attempted though estimation of money-demand functions and exchange-rate functions. Concentrating on international stock shifts in the demand for money rather than on portfolio-growth effects (which are likely to be far less volatile), most researchers used the forward premium/discount or, what is approximately the same, the international interest- rate differential as the most promising determinant of currency substitution; for these variables reflect the expected difference in the opportunity cost of holding the monies concerned if interest is not paid on money balances or on required reserves.
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- Frenkel, Jacob A, 1977. "The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation," American Economic Review, American Economic Association, vol. 67(4), pages 653-70, September.
- Chrystal, K Alec, 1977. "Demand for International Media of Exchange," American Economic Review, American Economic Association, vol. 67(5), pages 840-50, December.
- Miles, Marc A, 1978. "Currency Substitution, Flexible Exchange Rates, and Monetary Independence," American Economic Review, American Economic Association, vol. 68(3), pages 428-36, June.
- Frenkel, Jacob A., 1979. "Further evidence on expectations and the demand for money during the German hyperinflation," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 81-96, January.
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