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Currency Substitution and the Stability of the Demand for Money in East Asia

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  • Olugbenga Onafowora
  • Oluwole Owoye

Abstract

This paper models and tests the stability of the demand for money in five East Asian countries—Indonesia, Malaysia, Philippines, Singapore, and Thailand—in the context of an open economy. The Johansen multivariate cointegration vector error correction analysis against quarterly data covering the period 1985:1-2001:4 was used. It was found that a stationary long run cointegrating relationship exists between broad money, real income, domestic interest rates, foreign interest rates corrected for exchange rate depreciation, and the expected rate of depreciation of the exchange rate. The results show that US Treasury bills rates and the foreign exchange rate vis-a-vis the US dollar play a significant role in the East Asian countries money demand relationship. This suggests that currency substitution vis-a-vis the US dollar may be an important consideration in the design and implementation of monetary policy in the East Asian countries. Furthermore, the results show that the Asian currency crises impacted the money demand functions negatively in these countries. CUSUM and CUSUMSQ stability tests show no evidence of parameter instability of the money demand functions in three of the five countries throughout the period under investigation.

Suggested Citation

  • Olugbenga Onafowora & Oluwole Owoye, 2005. "Currency Substitution and the Stability of the Demand for Money in East Asia," Global Economic Review, Taylor & Francis Journals, vol. 34(2), pages 233-259.
    • Handle: RePEc:taf:glecrv:v:34:y:2005:i:2:p:233-259
    DOI: 10.1080/12265080500117574
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    References listed on IDEAS

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    1. Mr. Robert Dekle & Mahmood Pradhan, 1997. "Financial Liberalization and Money Demand in Asean Countries: Implications for Monetary Policy," IMF Working Papers 1997/036, International Monetary Fund.
    2. Ms. Liliana Rojas-Suárez, 1992. "Currency Substitution and Inflation in Peru," IMF Working Papers 1992/033, International Monetary Fund.
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    Cited by:

    1. Ahmad Baharumshah & Siew-Voon Soon, 2015. "Demand for broad money in Singapore: does wealth matter?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 557-573, July.

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