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

Record type: Monograph (Discussion Paper)

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.

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Citation

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).

More information

Published date: January 1991
Keywords: currency substitution, money demand, vehicle currencies

Identifiers

Local EPrints ID: 37392
URI: http://eprints.soton.ac.uk/id/eprint/37392
PURE UUID: f58c6fa6-2104-403e-b61b-527dd040280c

Catalogue record

Date deposited: 29 May 2008
Last modified: 17 Jul 2017 15:42

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Contributors

Author: Stephen H. Thomas
Author: Michael R. Wickens

University divisions


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