The dynamics of inflation and currency substitution in a small open economy

In this paper, we analyse the relationship between money and inflation in a small open economy where domestic and foreign currencies are perfect substitutes as means of payment. It is shown that, if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled, there will be an adjustment period during which domestic inflation adjusts so as to equalise the foreign inflation rate. In the case of a disinflation program, it is shown that the foreign currency is not necessarily abandoned as means of payment. The results obtained are consistent with both dollarisation hysteresis and reversibility, without requiring the specification of dollarisation costs.currency substitution, dollarisation, money-demand and hysteresis

Portugal-EU convergence revisited: evidence for the period 1960-2003

This paper uses the stochastic approach to convergence to investigate whether real per capita GDP in Portugal has been converging to the EU15 average. The estimation accounts for conditional convergence, transitional dynamics and up to two structural breaks. It is found that per capita GDP in Portugal has indeed converged to the EU15 average, but the pace convergence has not been uniform along time. In particular, a slow down in the convergence process is identified in 1974. This result depends, however, as to whether the choice of this break-date is viewed as uncorrelated with the data. No evidence of acceleration in the speed of convergence is found after EC accession, in 1986.Unit root test, Income convergence, The Portuguese Economy.

The Dynamics of Inflation and Currency Substitution in a Small Open Economy

In this paper, we analyse the relationship between money and inflation in a small open economy where domestic and foreign currencies are perfect substitutes as means of payment. It is shown that, if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled, there will be an adjustment period during which domestic inflation adjusts so as to equalise the foreign inflation rate. In the case of a disinflation program, it is shown that the foreign currency is not necessarily abandoned as means of payment. The results obtained are consistent with both dollarisation hysteresis and reversibility, without requiring the specification of dollarisation costs.currency substitution, dollarisation, money-demand and hysteresis.

Currency Substitution, Portfolio Diversification and Money Demand

The paper explores the implications of means of payment substitutability and capital mobility on the properties of the money demand, using the Thomas (1985) stochastic dynamic optimising model, where the specific role of money is explicitly accounted for. Extending the model to a case in which the consumer has no access to bonds denominated in foreign currency, we are able to describe the double role (means of payment and store of value) that foreign bank notes may have in countries where asset markets are illiquid. We show that means of payment substitutability opens a channel through which portfolio decisions influence the demand for domestic money, even if the later is dominated as store of value. Contrary to what suggested by the Portfolio Balance Theory of Currency Substitution (Cuddington, 1983), the results obtained in this paper suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the presence of CSMoney Demand, Currency Substitution, Dollarisation, Portfolio Choice.

Revisiting Dollarisation Hysteresis: Evidence from Bolivia, Turkey and Indonesia

In this paper, we pick up three countries with different inflation experiences and dollarisation levels and we investigate whether dollarisation exhibits different reversibility patterns, as suggested by the literature. The sample includes a country that experienced hyperinflation (Bolivia), a high inflation country (Turkey) and a country that experienced moderate to low inflation (Indonesia). By providing evidence of dollarisation hysteresis in these three countries, this paper challenges the view according to which this phenomenon is confined to highly dollarised economies or to economies that experienced high inflation rates for long periods of time.Money demand, currency substitution, dollarisation, hysteresis.

Currency substitution and money demand in Euroland

This papers tests the stability of the demand for money in the euro area in the context of an open economy. A sample consisting of quarterly data covering the 1982:2-1999:3 period is considered. The main finding is that the US long term rate of interest plays a significant role in the European money demand relationship. This result holds for different combinations of variables forming the vector auto-regressive system and suggests that currency substitution vis-à-vis the US dollar may be an important factor influencing the ECB monetary policy.EMU, Money Demand, International Currencies, Currency Substitution.

Currency Substitution, portfolio Diversification and Money Demand

We extend the Thomas (1985) dynamic optimissing model of money demand and currency substitution to the case in which the individual has no access to bonds denominated in foreign currency. We show that in this case the demand for domestic money is influenced by portfolio decisions. Contrary to what defended by the Portfolio Balance Approach to currency substitution, the results obtained in this paper suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the present of curency substitution. The results also suggest that, in countries facing monetary instability and currency substitution, restricting the availability of interest-bearning assets denominated in foreign currency may have a destabilising impact on the money demand.Money Demand, currency Substitution, Dollarisation, Portfolio Choice.