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A cross‐country panel analysis of currency substitution and trade
Author(s) -
Milner C,
Mizen P,
Pentecost E
Publication year - 2000
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2000.tb00014.x
Subject(s) - currency , economics , pooling , currency substitution , panel data , substitution (logic) , monetary economics , international economics , econometrics , foreign exchange risk , artificial intelligence , computer science , programming language
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.