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Substitution, Income, and Intertemporal Effects In Currency‐Substitution Models *
Author(s) -
Smith Constance E.
Publication year - 1995
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.1995.tb00051.x
Subject(s) - currency substitution , economics , substitution (logic) , monetary economics , depreciation (economics) , currency , exchange rate , substitution effect , interest rate , macroeconomics , foreign exchange risk , microeconomics , profit (economics) , capital formation , financial capital , computer science , programming language
Empirical studies which aim to determine the extent of international currency substitution typically focus on the coefficient associated with the anticipated rate of depreciation of the domestic currency or on the foreign interest rate in the domestic money demand equation. an intertemporal optimizing model is used to obtain a money demand function which shows that the anticipated exchange‐rate change and the foreign interest rate capture an income effect and an intertemporal income or substitution effect. Using these theoretical results, the findings from empirical studies are examined to show circumstances in which international currency substitutability may have been overstated or understated.