Currency Substitution and Money Demand in Euroland

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Currency substitution

Currency Substitution and Money Demand in Euroland

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This paper tests the stability of the demand for money in the euro-area in the context of an open economy. A sample consisting of quarterly data covering the 1982:2-1999:3 period is considered. The main finding is that the U.S. dollar long-term interest rate plays a significant role in the European money demand relationship. (…)

Currency Substitution, Portfolio Diversification, and Money Demand

Miguel Lebre Freitas

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We extend the Thomas (1985) dynamic optimizing model of money demand currency substitution to the case in which the individual has restricted or no access foreign currency denominated bonds. In this case currency substitution decisions and a substitution decisions are not separable. (…)

The Dynamics of Inflation and Currency Substitution in a Small Open Economy

Miguel Lebre Freitas

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This paper analyzes the relationship between money and inflation in a small open economy, where domestic and foreign currencies are perfect substitutes as means of payment. It is shown that, if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled, there will be an adjustment period during which domestic inflation adjusts to equal the foreign inflation rate. (…)