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...

This paper reviews the extensive theoretical and empirical literature on currency substitution. After discussing the ambiguity surrounding the definition of currency substitution, the paper illustrates the causes of substitutability of different currencies using a cash-in-advance model and a...

The paper reports results obtained from the simulation of a two-country model in which the real and financial sectors are integrated under an assumption of rational expectations and steady-state inflationary equilibria. The government of each country issues a single financial asset ("currency")...

We present a monetary model in the presence of segmented asset markets that im- plies a persistent fall in interest rates after a once and for all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization...

A smooth progression from Stage Two to Stage Three of EMU requires that the type of policy planned for Stage Three should be foreshadowed in Stage Two. Two possibilities for that policy are monetary targeting or an interest rate policy feeding back on a nominal variable. The paper re-examines...

Money demand instability has been the subject of considerable attention in the recent literature. This paper examines the stability of velocity series for the United States and for five European countries (France, Germany, Italy, the Netherlands and the United Kingdom). A distribution-free test...

In this paper we argue that the relevant decision for the majority of US households is not the fraction of assets to be held in interest-bearing form, but whether to hold such assets at all (we call this ‘the decision to adopt’ financial technology). We show that the key variable governing...

In this paper we propose a test of the hyperinflation model of money demand, which is valid under any assumption concerning agents' expectations, subject only to the restriction that forecasting errors are stationary. It is also demonstrated that highly efficient estimates of the model can be...

We extend the Baumol-Tobin cash inventory model to a dynamic environment, which allows for the possibility of withdrawing cash at random times at a low cost. This modification captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We...

The partial-adjustment approach to the specification of the short-run demand for money has dominated the literature for more than a decade. There are three basic problems with this approach. First, the same lag structure is imposed on all variables, and such independent variables enters only as...