1 / 31

Academy of Economic Studies Doctoral School of Finance and Banking

Academy of Economic Studies Doctoral School of Finance and Banking. CURRENCY SUBSTITUTION IN ROMANIA MSc Student: Ciprian Dascalu Supervisor: Professor Moisa Altar. THEORETICAL BACKGROUND. Definitions - Currency substitution - Currency substitutability

dalila
Télécharger la présentation

Academy of Economic Studies Doctoral School of Finance and Banking

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Academy of Economic StudiesDoctoral School of Finance and Banking CURRENCY SUBSTITUTION IN ROMANIA MSc Student: Ciprian Dascalu Supervisor: Professor Moisa Altar

  2. THEORETICAL BACKGROUND • Definitions - Currency substitution - Currency substitutability Dollarisation or Currency Substitution Theoretical models: - cash-in-advance models - transaction-costs models - ad-hoc models

  3. EMPIRICAL BACKGROUND • Money demand functions for domestic and foreign currency are part of a sequential portfolio balance model; • Two-period portfolio balance model; • Models dealing with representative agent dynamic optimization problem; • Money demand models including ratchet effect to account for hysteresis; • Pros and Cons of currency substitution

  4. DEPENDENT VARIBLES • Total stock of money in domestic currency (M_ROL1); • The total stock of domestic money in banking system (M_ROL2), since there is no reliable data on foreign currency in circulation; • The ratio of foreign currency deposits and brad money (CS1); • The proportion of foreign deposits in total term deposits (CS2), considering that foreign currency deposits are primarily hold for store of value proposes; • The ratio between domestic and foreign currency (CS3) to inspect the substitution between domestic and foreign currency deposits. • All dependent variables are in logarithms.

  5. EXPLANATORY VARIABLES • A scale variable, the industrial production (IPI), in logarithm; • The own return (marginal) of domestic money, the deposit interest rate for non-banking clients (DR); • The opportunity cost of holding money, the return on treasury bills (TBR); • The inflation rate since real assets represent an alternative to money holding (INFLATION); • Exchange rate depreciation against a basket comprised of (60% EURO and 40% USD) (D_BASKET) as the relative cost of holding domestic money instead of foreign currency; • The past peak values of the exchange rate (R_BASKET) and the past peak values of currency substitution ratios (R_CS), to account for the ratchet effect, both expressed in logarithms.

  6. MODEL USED • Portfolio Balance Model – a version of Branson and Henderson (1985) to investigate currency substitutability, this model implies a negative sign associated to depreciation rate as an evidence that domestic currency could be substituted by a foreign currency: • Analysis of the currency substitution as a ratio without imposing restriction reflecting a particular money demand theory, since foreign deposits have a significant store of value role; • The possibility of an asymmetric reaction of foreign currency holdings to its main determinants.

  7. METHODOLOGY • ECM’s proved to be a useful tool for estimation of money demand functions, along with the long run relation given by cointegration using Johansen procedure; • Data span is 1996:01 – 2002:12; • Data is not seasonally adjusted (such pre-filtering may affect the short-run dynamics); • Except the depreciation rate and the rate of inflation which are probably I(0), the rest of variable are I(1), they shouldn't be excluded of the cointegration vector (Dickey and Rossana (1994), Harris (1995)).

  8. Variable M_ROL1 Eq. 2 M_ROL1 Eq. 1 IPI 2.278764 (0.87578) [-2.60199] 2.623697 (1.39953) [-1.87470] - 2.898162 (0.41354) [ 7.00822] D_EXBASKET -1.181348 (0.33638) [ 3.51196] 1.739506 (0.36544) [-4.76009] DR 0.744964 (0.16083) [-4.63206] -1.380286 (0.40548) [ 3.40406] INFLATION -1.090635 (0.28317) [ 3.85156] -0.262162 (0.20235) [ 1.29557] TBR *** -0.048624 (0.01287) [-3.77869] -0.017941 (0.00412) [-4.35809] SPEED OF ADJUSTMENT CURRENCY SUBSTITUTABILITY Standard errors in ( ) & t-statistics in [ ].

  9. STABILITY TESTS

  10. STABILITY TESTS

  11. Variable IPI D_EXBASKET DR INFLATION TBR SPEED OF ADJUSTMENT 1.535829 (1.18773) [-1.29308] -2.534164 (0.35427) [ 7.15324] 1.274687 (0.30092) [-4.23600] -1.328478 (0.34871) [ 3.80972] -0.117193 (0.17108) [ 0.68501] -0.019251 (0.00513) [-3.75288] M_ROL2 Eq. 2 3.164238 (1.53578) [-2.06034] -2.279694 (0.38367) [ 5.94174] 1.347877 (0.25102) [-5.36967] -1.474063 (0.41126) [ 3.58429] *** -0.013053 (0.00392) [-3.33061] M_ROL2 Eq. 1 CURRENCY SUBSTITUTABILITY Standard errors in ( ) & t-statistics in [ ].

  12. STABILITY TESTS

  13. STABILITY TESTS

  14. MODEL1 Eq.1 MODEL1 Eq.2 MODEL2 Eq.1 MODEL2 Eq.2 Χ2(1) p-value 28.21274 32.95289 31.13666 28.99550 0.000000 0.000000 0.000000 0.000000 EVIDENCE THAT DOMESTIC CURRENCY HAS THE ABILITY OF BEING SUBSTITUTED The null hypothesis is that the coefficient associated to exchange rate depreciation is zero.

  15. MODEL1 MODEL2 Χ2(1) 0.142438 0.026553 p-value 0.705869 0.870557 RESTRICTION IN LINE WITH THE QUANTITATIVE THEORY OF MONEY The null hypothesis is that the coefficient associated to the scale variable is one.

  16. ΔMROL2 ΔMROL1 ΔIPI ΔIPI ΔD_EXBASKET ΔD_EXBASKET ΔDR ΔDR ΔINFLATION ΔINFLATION ΔTBR ΔTBR Χ2(1) 14.06821 0.002699 13.41405 11.59228 2.277853 3.478700 Χ2(1) 11.29531 0.044568 14.01270 11.86642 1.315177 3.533511 p-value 0.000176 0.958567 0.000250 0.000662 0.131233 0.062164 p-value 0.000777 0.832801 0.000182 0.000572 0.251459 0.060140 WEAK EXOGEINITY The null hypothesis is that there is weak exogeneity. The deposit rate (after the sharp decline in money demand after 1997, the NBR stimulated its recovery through a rise in the level of interest rates) and the depreciation basket (demonetisation of the economy raise the demand for foreign currency) adjust to the disequilibria in the cointegration vector.

  17. Variable IPI D_BASKET INFLATION DR CONSTANT CS1 Eq. 1 1.393081 (0.58447) [-2.38352] 1.997812 (0.30438) [-6.56346] 1.033161 (0.24987) [-4.13479] -0.341896 (0.10067) [ 3.39616] -0.686649 CS2 Eq. 2 2.055270 (0.56903) [-3.61190] 2.473727 (0.26466) [-9.34698] 1.339928 (0.22015) [-6.08642] -0.196935 (0.10357) [ 1.90152] -1.228833 CS3 Eq. 3 3.417434 (1.05484) [-3.23977] 4.297071 (0.48402) [-8.87779] 2.400730 (0.41233) [-5.82229] -0.498750 (0.19278) [ 2.58714] -0.378053 CURRENCY SUBSTITUTION Standard errors in ( ) & t-statistics in [ ].

  18. Variable D_BASKET INFLATION DR R_CS R_BASKET CS1 0.230260 (0.06829) [-3.37196] 0.354158 (0.05358) [-6.61020] -0.093167 (0.02712) [ 3.43583] *** 0.328494 (0.02543) [-12.9165] CS1 1.515158 (0.24022) [-6.30731] 0.773906 (0.17694) [-4.37376] -0.169877 (0.07405) [ 2.29419] 0.544877 (0.25696) [-2.12044] *** CS2 0.393951 (0.14169) [-2.78032] 0.553937 (0.10266) [-5.39601] - 0.231276 (0.05256) [ 4.40039] *** 0.203886 (0.04726) [-4.31418] CS3 1.036575 (0.33192) [-3.12292] 1.328823 (0.24507) [-5.42230] -0.560334 (0.12433) [ 4.50696] *** 0.310811 (0.11121) [-2.79484] HYSTERESIS Standard errors in ( ) & t-statistics in [ ].

  19. CONCLUSIONS • The demand for domestic currency is sensitive to exchange rate depreciation, thus the national money could be replaced by foreign currency. • Raising the interest rate on deposits would be a solution for reverting the currency substitution process. But there were periods with negative real interest rate. • In Romania the substitution process was rather encouraged since the reserve requirements established a lower rate for foreign currency deposits until November 2002 (when the rate of reserve requirements was set at 25% for deposits in foreign exchange and 18% for deposits in national currency, with a view to effectively discourage further dollarisation).

  20. References: Berg, A. and E. Borensztein (2000), “The Prons and Cons of Full Dollarization”, IMF Working Paper 50, 2000. Bordo, M. D. and E. U. Choudhri (1982), “Currency Substitution and the Demand for Money: Some evidence for Canada”, Journal of Money, Credit and Banking, 14, 48-57. Bufman, G. and L. Leiderman (1992), Simulating an Optimizing Model of Currency Substitution. Revista de Analisis Economico, vol. 7, No. 1, 1992. Calvo, G.A. (1999), “On Dollarization”, University of Maryland, 1999. Calvo, G.A. and C. A. Rodriguez (1977). A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations, Journal of Political Economy, 85, 617-625. Calvo, G. A. and A. Vegh (1992), A Model of Exchange Rate Determination Under Currency Substitution and Rational Expectations, Journal of Political Economy, vol. 85, No. 3, 1992. Civcir, I. (2003), “Broad Money Demand and Currency Substitution in Turkey”, The Journal of Developing Areas, Volume 36, Number 2, 2003. Cuthbertson, K. and D. Bredin (2001), “Money Demand in the Czech Republic since Transition”, Journal of Policy Reform, 2001. Daniel, B. C. and H. O. Fried (1983), “Currency Substitution, Postal Strikes, and Canadian Money Demand”, The Canadian Journal of Economics, 16, 612-624. De Freitas, M.L. (2000), “Dollarization hysteresis: further empirical evidence”, Universidade de Alveiro, 2000. De Freitas, M.L. (2001), “Revisiting the dollarization puzzle: Evidence from Bolivia, Turkey and Indonesia”, Universidade de Alveiro, 2001. Enders, W. (2000), “Applied econometric time series”, Iowa State University, John Wiley & Sons, Inc. Feige, E. L., V. Sosic, M. Faulend, and V. Sonje (2000), “Currency substitution, Unofficial Dollarization, and Estimates of Foreign Currency held abroad: the case of Croatia”, in Blejer, M. and Skreb M.: “Financial Policies in Emerging Markets”, Cambridge, Mass: The MIT Press. Feige, E. L. (2002), “Empirical evidence on currency substitution, dollarization and euroization in transition economies”, The Eight Dubrovnik Economic Conference. Fisher, S. (1982), “Seniorage and the Case for a National Money”, Journal of Political Economy, 90, 295-313. Giovannini, A. and B. Turtelboom (1992), “Currency substitution”, National Bureau of Economic Research Working Paper Series, No 4232, Cambridge 1992. Girton, L. and D. Roper (1981), “Theory and Implication of Currency Substitution”, Journal of Money, Credit and Banking, 13, 12-30.

  21. Hamilton, D. J. (1994), “Time series analysis”, Princeton University Press. Harris, R.I.D. (1995), “Using Cointegration analysis in Econometric Modeling”, Prentice Hall, 1995. Komarek, L. and M. Melecky (2001), “Currency substitution in the transition economy: a case of the Czech Republic 1993-2001”, Warwick Economic Research Papers, No 613. Lazea, V. and B. Cozmanca (2003), “Currency substitution in Romania” Liviatan, N. (1981), “Monetary Expansion and Real Exchange Rate Dynamics, Journal of Political Economy, 89, 1218-1227. McKinnon, R. I. (1982), “Currency Substitution and Instability in the World Dollar Standard”, The American Economic Review, 72, 320-333. Miles, M. A. (1978), “Currency Substitution, Flexible Exchange Rates, and Monetary Independence”, The American Economic Review, 68, 428-436. Mizen, P. and E. J. Pentecost (1990), “Evaluating Empirical Evidence for Currency Substitution: A Case Study of the Demand for Sterling in Europe”, The Economic Journal, 104, 1057-1069. Mongardini, J. and J. Mueller (1994), “Rachet Effects in Currency Substitution: An Application to the Kyrgyz Republic”, IMF Working Paper 102, 1999. Ortiz, G. (1983). “Currency Substitution in Mexico: The Dollarization Problem”. Journal of Money, Credit and Banking , l. 15, 174-185. Rogers, J. H. (1990), “Foreign inflation Transmission under Flexible Exchange Rates and Currency Substitution”, Journal of Money, Credit and Banking, 22, 195-208. Rogers, J. H. (1992), “The Currency Substitution Hypothesis and Relative Money Demand in Mexico and Canada”, Journal of Money, Credit and Banking, 1992, 300-318. Thomas, L. R. (1985), Portfolio Theory and Currency Substitution. Journal of Money, Credit and Banking, vol. 17, No. 3, 347-357. Sarajevs, V. (2000), Econometric Analysis of Currency Substitution: A Case of Latvia. Bank of Finland Discussion Papers, Institute for Economies in Transition, No. 4, 2000. Sriram, S.S. (1999), “Survey of Literature on Demand for Money: Theoretical and Empirical Work with Special Reference to Error-Correction Models”, IMF Working Paper no 64, 1999. Uribe, M. (1997), “Hysteresis in a simple model of currency substitution”, Journal of Monetary Economics, No 40 185-202, 1997. Van Aarle, B. and N. Budina (1995), “Currency Substitution in Eastern Europe”, Tilburg University Discussion Paper, No 2, 1995.

More Related