Asset Substitution, Money Demand, and the Inflation Process in Brazil.

Various domestic financial assets in Brazil have provided relatively liquid nonmonetary alternatives. Monthly money demand estimates, which include domestic asset opportunity costs and take account of T-bill repurchase agreements in a dynamic error-correction model, demonstrate the importance of domestic substitutes in explaining money holdings. Money demand appears responsive and stable. Moreover, T-bills and indexed bonds have acted as an alternative to central bank liabilities as a source of finance for government deficits. Evidence indicates that the initial financing of government deficits through bonds, bills, and other nonmonetary liabilities may explain why money lags price shocks rather than vice versa. Copyright 1989 by Ohio State University Press.