Document Type
Article
Publication Date
1-3-2019
Publication Title
Journal of Macroeconomics
Publisher
Elsevier
Volume
60
First page number:
33
Last page number:
45
Abstract
This paper investigates the effect of currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro on CEE money demand functions. In addition, we develop a model with microeconomic foundations, which identifies the difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to the money demand sensitivity to interest rate spreads between CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand absent a currency substitution effect. This model applies to any country in which 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.
Keywords
Money demand; Open-economy model; Currency substituation; Cointegration; Cee country
Disciplines
Economics
File Format
File Size
486 KB
Language
English
Repository Citation
Albulescu, C. T.,
Pepin, D.,
Miller, S. M.
(2019).
The Micro-Foundations of an Open Economy Money Demand: An Application to Central and Eastern European Countries.
Journal of Macroeconomics, 60
33-45.
Elsevier.
http://dx.doi.org/10.1016/j.jmacro.2019.01.002