Premium
Modelling opportunity cost effects in money demand due to openness
Author(s) -
Huellen Sophie,
Qin Duo,
Lu Shan,
Wang Huiwen,
Wang Qing Chao,
Moraitis Thanos
Publication year - 2022
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2175
Subject(s) - openness to experience , economics , monetary economics , china , opportunity cost , demand for money , broad money , monetary policy , financial crisis , financial market , speculative demand , macroeconomics , finance , microeconomics , psychology , political science , law , social psychology
We apply a novel model‐based approach to constructing composite international financial indices (CIFIs) as measures of opportunity cost effects that arise due to openness in money demand models. These indices are tested on the People’s Republic of China (PRC) and Taiwan Province of China (TPC), two economies which differ substantially in size and degree of financial openness. Results show that (a) stable money demand equations can be identified if accounting for foreign opportunity costs through CIFIs, (b) the monetary policy intervention in the PRC over the global financial crisis period temporarily mitigated disequilibrating foreign shocks to money demand, (c) CIFIs capture opportunity costs due to openness more adequately than commonly used US interest rates and (d) CIFI construction provides valuable insights into the channels through which foreign financial markets affect domestic money demand.