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

pdf

File Size

486 KB

Language

English

Available for download on Friday, January 03, 2020

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