Currency substitution and nonlinear error correction in Taiwan's demand for broad money

Jyh-Lin Wu and Yu-Hau Hu

Applied Economics, 2007, vol. 39, issue 13, 1635-1645

Abstract: We modify the conventional money demand function by including a real exchange rate variable to reflect the effect of currency substitution. Empirical evidence indicates that the variable is crucial to the long-run stability of Taiwan's money demand. After finding the failure of a linear error-correction model (ECM) in describing the dynamics of Taiwan's money demand, we apply a nonlinear ECM to examine its dynamics and support the appropriateness of the nonlinear model empirically.

Date: 2007
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DOI: 10.1080/09603100600675631

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