Document Type

Article

Language

eng

Format of Original

9 p.

Publication Date

1-2004

Publisher

Taylor & Francis (Routledge)

Source Publication

Applied Financial Economics

Source ISSN

0960-3107

Original Item ID

DOI: 10.1080/0960310042000164194

Abstract

This study deals with the issue of independent monetary policy and the stability of the domestic money demand function in the presence of currency substitution and capital mobility in five Asian economies. It is argued that money demand will be less stable and more difficult to control in the presence of international variables. The money demand function is derived using the portfolio balance approach. The results from the cointegration analysis reveal that capital mobility and currency substitution are significant factors in the domestic money demand equations for Indonesia, Korea, Malaysia, Singapore, and Thailand. The results also show that the US dollar, Japanese yen, and British pound are used significantly by domestic residents together with the domestic currency in Indonesia, Korea, Singapore and Thailand. However, in the case of Malaysia, despite the existence of currency substitution for the US dollar and Japanese yen, there is no evidence of currency substitution between the domestic currency and British pound. Therefore, for these countries to have an effective monetary policy, the monetary authorities should take into account the two international factors.

Comments

Accepted version. Applied Financial Economics, Vol. 14, No. 1 (January 2004): 19-27. DOI. © Taylor & Francis 2004. Used with permission.

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