Can Currency Demand Be Stable Under a Financial Crisis? The Case of Mexico

26 Pages Posted: 12 Feb 2006

See all articles by May Khamis

May Khamis

International Monetary Fund (IMF)

Alfredo Mario Leone

International Monetary Fund (IMF); George Washington University

Date Written: April 1999

Abstract

The paper finds strong evidence that real currency demand in Mexico remained stable throughout and after the financial crisis in Mexico. Cointegration analysis using the Johansen-Juselius technique indicates a strong cointegration relationship between real currency balances, real private consumption expenditures, and the interest rate. The dynamic model for real currency demand exhibits significant parameter constancy even after the financial crisis as indicated by a number of statistical tests. The paper concludes that the significant reduction in real currency demand under the financial crisis in Mexico could be appropriately explained by the change in the variables that historically explained the demand for real cash balances in Mexico. This result supports the Bank of Mexico`s use of a reserve money program to implement monetary policy under the financial crisis.

Keywords: Mexico, demand for currency, financial crisis, stability

JEL Classification: E41, C51, C52

Suggested Citation

Khamis, May and Leone, Alfredo Mario, Can Currency Demand Be Stable Under a Financial Crisis? The Case of Mexico (April 1999). IMF Working Paper No. 99/53, Available at SSRN: https://ssrn.com/abstract=880580

May Khamis (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Alfredo Mario Leone

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

George Washington University ( email )

2023 G Street NW
Washington, DC 20052
United States

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