Social and Behavioral Sciences Commons^™

The Micro-Foundations Of An Open Economy Money Demand: An Application To Central And Eastern European Countries, Claudiu T. Albulescu, Dominique Pepin, Stephen M. Miller

Economics Faculty Publications

This paper investigates the effect of currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro on CEE money demand functions. In addition, we develop a model with microeconomic foundations, which identifies the difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to the money demand sensitivity to interest rate spreads between CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand absent a currency substitution effect. This model applies to any country in which an international currency …