Currency Substitution, Portfolio Diversification, and Money Demand

25 Pages Posted: 15 Nov 2006  

Miguel Lebre de Freitas

Universidade de Aveiro - Departamento de Economia, Gestão e Engenharia Industrial

Francisco José Veiga

Universidade do Minho and NIPE

Abstract

We extend the Thomas (1985) dynamic optimizing model of money demand and currency substitution to the case in which the individual has restricted or no access to foreign currency denominated bonds. In this case currency substitution decisions and asset substitution decisions are not separable. The results obtained 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 currency substitution. Applying this approach to six Latin-American countries, we find evidence of currency substitution in Colombia, Dominican Republic, and Venezuela, but not in Brazil and Chile.

Suggested Citation

de Freitas, Miguel Lebre and Veiga, Francisco José, Currency Substitution, Portfolio Diversification, and Money Demand. Canadian Journal of Economics, Vol. 39, No. 3, pp. 719-743, August 2006. Available at SSRN: https://ssrn.com/abstract=944939 or http://dx.doi.org/10.1111/j.1540-5982.2006.00366.x

Miguel Lebre De Freitas (Contact Author)

Universidade de Aveiro - Departamento de Economia, Gestão e Engenharia Industrial ( email )

Rua Associação Humanitária Bombeiros de Aveiro
Aveiro, 3800
Portugal

Francisco José Veiga

Universidade do Minho and NIPE ( email )

Escola de Economia e Gestao
Campus de Gualtar
4710-057 Braga
Portugal
+351 25 360 4534 (Phone)
+351 253 67 6375 (Fax)

HOME PAGE: http://www.eeg.uminho.pt/economia/fjveiga/english/fjveiga_english.html

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