Abstract
This paper examines currency substitution in Canadian money demand vis-à-vis the U.S. dollar. A variant of the model developed by Bordo and Choudhri (1982) is estimated to test for the presence and extent of this substitution. The modified model is enhanced by the introduction of foreign exchange transactions costs. The resulting increased explanatory power indicates that previous tests which have omitted such costs understate the extent of currency substitution.
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This paper draws upon chapter 5 of Bana (1985). We are grateful to Le fond FCAC pour l'aide le soutien à la recherche for financial assistance. We are also grateful to two referees of this journal for their advice and suggestions.
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Handa, J., Bana, I.M. Currency substitution and transactions costs. Empirical Economics 15, 231–243 (1990). https://doi.org/10.1007/BF02426967
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DOI: https://doi.org/10.1007/BF02426967