Exchange Rate Volatility and the Demand for Money in the U.S.

Document Type

Article

Language

eng

Format of Original

15 p.

Publication Date

1995

Publisher

Elsevier

Source Publication

International Review of Economics and Finance

Source ISSN

1059-0560

Abstract

This paper examines the effect of changes in the level and volatility of exchange rates on the demand for money. It hypothesizes that exchange rate volatility exerts a negative influence on money demand separate from the effect of the level of exchange rates. Using U.S. data covering the period from 1974.1 to 1990.4, it is found that, regardless of whether the adjustment process is modeled as an error-correction or a partial-adjustment model, exchange rate volatility is negatively related to the demand for real M2 balances. This relationship is found to be more pronounced when exchange rates are expressed in real terms. The results imply that money demand responds to both the volatility of domestic prices relative to foreign prices and to the volatility of nominal exchange rates. Little evidence is found in support of the hypothesis that the level of exchange rates exerts a significant influence on money demand.

Comments

International Review of Economics & Finance, Vol. 4, No. 4 (1995): 411–425. DOI.

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