Currency Substitution and Transactions Costs

Jagdish Handa and Ismail Mohamed Bana

Empirical Economics, 1990, vol. 15, issue 3, 43 pages

Abstract: This paper examines currency substitution in Canadian money demand vis-a-vis the U.S. dollar. A variant of the model developed by Bordo and Choudhri (1982) is estimated to test for the presence and extent of this substitution. The modified model is enhanced by the introduction of foreign exchange transactions costs. The resulting increased explanatory power indicates that previous tests which have omitted such costs understate the extent of currency substitution.

Date: 1990
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