The Micro-Foundations of an Open Economy Money Demand: An Application to the Central and Eastern European Countries

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

No 2018-06, Working papers from University of Connecticut, Department of Economics

Abstract: This paper investigates and compares 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, even absent a currency substitution effect. This model applies to any country where 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)
Pages: 33 pages
Date: 2018-06
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon, nep-opm and nep-tra
Note: Stephen Miller is the corresponding author
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://media.economics.uconn.edu/working/2018-06.pdf Full text (application/pdf)

Related works:
Journal Article: The micro-foundations of an open economy money demand: An application to 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 (2019)
Working Paper: The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2018-06

Access Statistics for this paper

More papers in Working papers from University of Connecticut, Department of Economics University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063. Contact information at EDIRC.
Bibliographic data for series maintained by Mark McConnel ().