The micro-foundations of an open economy money demand: An application to central and eastern European countries

Claudiu Albulescu (), Dominique Pépin () and Stephen Miller

Journal of Macroeconomics, 2019, vol. 60, issue C, 33-45

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 substitution; Cointegration; CEE countries (search for similar items in EconPapers)
JEL-codes: E41 E52 F41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries (2019)
Working Paper: The Micro-Foundations of an Open Economy Money Demand: An Application to the Central and Eastern European Countries (2018)
Working Paper: The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:60:y:2019:i:c:p:33-45

DOI: 10.1016/j.jmacro.2019.01.002

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