Currency Substitution, portfolio Diversification and Money Demand
We extend the Thomas (1985) dynamic optimissing model of money demand and currency substitution to the case in which the individual has no access to bonds denominated in foreign currency. We show that in this case the demand for domestic money is influenced by portfolio decisions. Contrary to what defended by the Portfolio Balance Approach to currency substitution, the results obtained in this paper suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the present of curency substitution. The results also suggest that, in countries facing monetary instability and currency substitution, restricting the availability of interest-bearning assets denominated in foreign currency may have a destabilising impact on the money demand.
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal|
Phone: +351-253604510 ext 5532
Web page: http://www3.eeg.uminho.pt/economia/nipe/versao_inglesa/index_uk.htm
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October.
- Uribe, Martin, 1997.
"Hysteresis in a simple model of currency substitution,"
Journal of Monetary Economics,
Elsevier, vol. 40(1), pages 185-202, September.
- Martin Uribe, 1995. "Hysteresis in a simple model of currency substitution," International Finance Discussion Papers 509, Board of Governors of the Federal Reserve System (U.S.).
- Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
- Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
- Rogers, J.H., 1990.
"The Currency Substitution Hypothesis And Relative Money Demand In Mexico And Canada,"
7-90-1, Pennsylvania State - Department of Economics.
- Rogers, John H, 1992. "The Currency Substitution Hypothesis and Relative Money Demand in Mexico and Canada," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 300-318, August.
- Kamin, Steven B. & Ericsson, Neil R., 2003. "Dollarization in post-hyperinflationary Argentina," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 185-211, April.
- Miguel Lebre de Freitas, 2004.
"The Dynamics of Inflation and Currency Substitution in a Small Open Economy,"
NIPE Working Papers
1/2004, NIPE - Universidade do Minho.
- Lebre de Freitas, M., 2004. "The dynamics of inflation and currency substitution in a small open economy," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 133-142, February.
- Miguel Lebre de Freitas, 2003. "The dynamics of inflation and currency substitution in a small open economy," Working Papers de Economia (Economics Working Papers) 02, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro, revised Aug 2003.
- Shi Shougong, 1995.
"Money and Prices: A Model of Search and Bargaining,"
Journal of Economic Theory,
Elsevier, vol. 67(2), pages 467-496, December.
- Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
- Pablo E. Guidotti & Carlos A. Rodriguez, 1992.
"Dollarization in Latin America: Gresham's Law in Reverse?,"
IMF Staff Papers,
Palgrave Macmillan, vol. 39(3), pages 518-544, September.
- Pablo Emilio Guidotti & Carlos A. Rodriguez, 1991. "Dollarization in Latin America; Gresham's Law in Reverse?," IMF Working Papers 91/117, International Monetary Fund.
- Pablo Guidotti & Carlos A. Rodríguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," CEMA Working Papers: Serie Documentos de Trabajo. 81, Universidad del CEMA.
- John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 207-222.
- Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416.
- Thomas, Lee R, 1985. "Portfolio Theory and Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 347-57, August.
- Branson, William H. & Henderson, Dale W., 1985.
"The specification and influence of asset markets,"
Handbook of International Economics,
in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805
- Agenor, Pierre-Richard & Khan, Mohsin S., 1996.
"Foreign currency deposits and the demand for money in developing countries,"
Journal of Development Economics,
Elsevier, vol. 50(1), pages 101-118, June.
- Mohsin S. Khan & Pierre-Richard AgÃ©nor, 1992. "Foreign Currency Deposits and the Demand for Money in Developing Countries," IMF Working Papers 92/1, International Monetary Fund.
- Ratti, Ronald A & Jeong, Byung Woo, 1994. "Variation in the real exchange rate as a source of currency substitution," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 537-550, October.
- Alan C. Stockman, 1978.
"A Theory of Exchange Rate Determination,"
UCLA Economics Working Papers
122, UCLA Department of Economics.
- 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.
- Eduardo Levy Yeyati, 2006.
"Financial dollarization: evaluating the consequences,"
CEPR;CES;MSH, vol. 21(45), pages 61-118, 01.
- Eduardo Levy-Yeyati, 2004. "FINANCIAL DOLLARIZATION: Evaluating the consequences," Econometric Society 2004 Latin American Meetings 184, Econometric Society.
- Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers findollarisation, Universidad Torcuato Di Tella.
- Imrohoroglu, Selahattin, 1994. "GMM Estimates of Currency Substitution between the Canadian Dollar and the U.S. Dollar," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 792-807, November.
- Akcay, O. Cevdet & Alper, C. Emre & Karasulu, Meral, 1997. "Currency substitution and exchange rate instability: The Turkish case," European Economic Review, Elsevier, vol. 41(3-5), pages 827-835, April.
- Paul R. Krugman, 1984. "The International Role of the Dollar: Theory and Prospect," NBER Chapters, in: Exchange Rate Theory and Practice, pages 261-278 National Bureau of Economic Research, Inc.
- Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-99.
- 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.
- Joines, Douglas H., 1985. "International currency substitution and the income velocity of money," Journal of International Money and Finance, Elsevier, vol. 4(3), pages 303-316, September.
- Smith, Constance E, 1995. "Substitution, Income, and Intertemporal Effects in Currency-Substitution Models," Review of International Economics, Wiley Blackwell, vol. 3(1), pages 53-59, February.
- Mizen, Paul & Pentecost, Eric J, 1994. "Evaluating the Empirical Evidence for Currency Substitution: A Case Study of the Demand for Sterling in Europe," Economic Journal, Royal Economic Society, vol. 104(426), pages 1057-69, September.
- Chang, Roberto, 1989.
"Endogenous Currency Substitution, Inflationary Finance, And Welfare,"
89-12, C.V. Starr Center for Applied Economics, New York University.
- Chang, Roberto, 1994. "Endogenous Currency Substitution, Inflationary Finance, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 903-16, November.
- Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
When requesting a correction, please mention this item's handle: RePEc:nip:nipewp:9/2004. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria João Thompson)
If references are entirely missing, you can add them using this form.