Current Substitition and Money Demand in the United States, West Germany and Japan
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Current Substitition and Money Demand in the United States, West Germany and Japan
Baade, Robert A. | Nazmi, Nader
Credit and Capital Markets – Kredit und Kapital, Vol. 22 (1989), Iss. 3 : pp. 363–374
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Robert A. Baade, Lake Forest/Ill.
Nader Nazmi, Lake Forest/Ill.
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Abstract
Currency Substitution and Money Demand in the United States, West Germany and Japan
Money demand equations for the United States that predicted well during the late 1950s and throughout the 19605 began to significantly overpredict money demand in 1974. This “missing money” puzzle inspired a myriad of explanations. Since the adoption of floating exchange rates coincided with dollar demand overpredictions, one explanation has focused on a growing tendency to substitute other currencies for dollars in international portfolios. The purpose of this paper is to test the currency substitution thesis. The authors concluded that while there was a structural shift in the demand for money, perhaps induced by currency substitution among countries analyzed, currency substitution at best only partially explains dollar overpredictions.