Exchange rate volatility and demand for money in less developed countries

作者:Sahar Bahmani 刊名:Journal of Economics and Finance 上传者:嵇雪峰

【摘要】One implication of currency substitution is that the exchange rate could serve as another determinant of the demand for money. Indeed, many studies have justified this empirically for the majority of countries. If the exchange rate serves as a determinant of the demand for money, exchange rate volatility could also influence money demand. By using annual data from 15 less developed countries and the bounds testing approach, we show that exchange rate volatility has short-run effects on the demand for real M2 monetary aggregate in LDCs. However, in most countries, short-run effects are not sustained.

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J Econ Finan (2013) 37:442–452 DOI 10.1007/s12197-011-9190-y Exchange rate volatility and demand for money in less developed countries Sahar Bahmani Published online: 11 June 2011 # Springer Science+Business Media, LLC 2011 Abstract One implication of currency substitution is that the exchange rate could serve as another determinant of the demand for money. Indeed, many studies have justified this empirically for the majority of countries. If the exchange rate serves as a determinant of the demand for money, exchange rate volatility could also influence money demand. By using annual data from 15 less developed countries and the bounds testing approach, we show that exchange rate volatility has short-run effects on the demand for real M2 monetary aggregate in LDCs. However, in most countries, short-run effects are not sustained. Keywords Money Demand . Exchange Rate Volatility . Bounds Testing Less Developed Countries JEL Classification E41 . F30 1 Introduction The first of many studies that introduced the idea of including the exchange rate as another determinant of the demand for money in the money demand function was by Robert Mundell (1963). Since he made this argument without any empirical proof, many studies followed and empirically justified the link between exchange rate changes and the demand for money. These studies all emphasize that the demand for money depends not only on the interest rate and income, but also on the exchange rate. A study conducted by Arango and

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