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A Cross-Country Panel Analysis of Currency Substitution and Trade

Author

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  • Milner, Chris
  • Mizen, Paul
  • Pentecost, Eric

Abstract

Attention that has been directed toward the effect of trade on foreigner's holdings of domestic currency comes exclusively from time-series evidence. Here we extend a model of currency substitution that incorporates a trade motive for foreigners to hold domestic currency. It uses time-series and cross-sectional information for a panel of 17 industrialized countries testing two-way fixed-effects models against pooled and random-effects alternatives. The cross-sectional information is significant, revealing that pooling of data could result in misleading inferences, since country-specific effects, regional group effects, and distance are all important determinants of domestic currency holding by foreigners. Copyright 2000 by Oxford University Press.

Suggested Citation

  • Milner, Chris & Mizen, Paul & Pentecost, Eric, 2000. "A Cross-Country Panel Analysis of Currency Substitution and Trade," Economic Inquiry, Western Economic Association International, vol. 38(2), pages 206-217, April.
    • Handle: RePEc:oup:ecinqu:v:38:y:2000:i:2:p:206-17
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    Cited by:

    1. Heimonen, Kari, 2008. "Substituting a substitute currency," International Review of Economics & Finance, Elsevier, vol. 17(1), pages 66-84.
    2. repec:zbw:bofitp:2001_011 is not listed on IDEAS
    3. International Monetary Fund, 2002. "Macroeconomic Adjustment in a Highly Dollarized Economy: The Case of Cambodia," IMF Working Papers 2002/092, International Monetary Fund.
    4. Heimonen, Kari, 2001. "Substituting a substitute currency: The case of Estonia," BOFIT Discussion Papers 11/2001, Bank of Finland Institute for Emerging Economies (BOFIT).
    5. Heimonen, Kari, 2001. "Substituting a substitute currency : The case of Estonia," BOFIT Discussion Papers 11/2001, Bank of Finland, Institute for Economies in Transition.

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