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Currency Substitution, Portfolio Diversification and Money Demand

Miguel de Freitas ()

No 263, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: The paper explores the implications of means of payment substitutability and capital mobility on the properties of the money demand, using the Thomas (1985) stochastic dynamic optimising model, where the specific role of money is explicitly accounted for. Extending the model to a case in which the consumer has no access to bonds denominated in foreign currency, we are able to describe the double role (means of payment and store of value) that foreign bank notes may have in countries where asset markets are illiquid. We show that means of payment substitutability opens a channel through which portfolio decisions influence the demand for domestic money, even if the later is dominated as store of value. Contrary to what suggested by the Portfolio Balance Theory of Currency Substitution (Cuddington, 1983), the results obtained in this paper suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the presence of CS

Keywords: Money Demand; Currency Substitution; Dollarisation; Portfolio Choice. (search for similar items in EconPapers)
JEL-codes: E41 F41 G11 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cba, nep-fin, nep-ifn and nep-mon
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Related works:
Working Paper: Currency Substitution, Portfolio Diversification and Money Demand (2010) Downloads
Journal Article: Currency substitution, portfolio diversification, and money demand (2006)
Working Paper: Currency Substitution, portfolio Diversification and Money Demand (2004) Downloads
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