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EU-WIDE MONEY AND CURRENCY SUBSTITUTION

Miguel de Freitas ()

The IUP Journal of Monetary Economics, 2006, vol. IV, issue 4, 48-63

Abstract: This paper re-addresses the issue of international currency substitution, estimating a money demand equation for the euro-area. The testing procedure accounts for two alternative theories of money demand—the liquidity services model and the portfolio-balance model. The evidence found is favorable to the CS hypothesis in general and to the liquidity services model of money demand in particular. This result, somehow expected, challenges some recent literature on Euro-Area money demand that has been exclusively devoted to the closed economy portfolio-balance model.

Date: 2006
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