Currency substitution and vehicle currencies: tests of alternative hypotheses for the Dollar, DM and Yen


Thomas, Stephen H. and Wickens, Michael R. Centre for Economic Policy Research (1991) Currency substitution and vehicle currencies: tests of alternative hypotheses for the Dollar, DM and Yen. London, UK, Centre for Economic Policy Research (CEPR Discussion Paper, (507) ).

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Description/Abstract

Recent concern about the difficulty of obtaining structurally stable models of money demand combined with the removal of capital controls have drawn attention to the theory of currency substitution (CS). The purpose of this paper is to examine whether CS is a relevant factor in the demand for currency. A number of different theories are considered. The traditional approach to the demand for money focuses on the domestic holding. In contrast CS is concerned with both domestic and foreign holding of domestic currency, and with the substitutability between domestic and foreign currencies. Often it is not realized that there are various CS theories and they give different predictions. CS theories can be supplemented by the theory of vehicle currencies which emphasizes the use of a currency in international transactions by third-party countries. In this paper all of these theories are tested using alternative definitions of money, including both resident and non-resident holding, for data on the US dollar, the yen and the deutschmark. The evidence provides support for both CS and vehicle-currency effects but more in non-resident than resident currency holdings.

Item Type: Monograph (Discussion Paper)
Related URLs:
Keywords: currency substitution, money demand, vehicle currencies
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 37392
Date Deposited: 29 May 2008
Last Modified: 27 Mar 2014 18:23
URI: http://eprints.soton.ac.uk/id/eprint/37392

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