Title: Currency substitution and the precautionary demand for money
Abstract: Although the implications of currency substitution have received considerable attention recently, the microeconomic foundations of this phenomenon seem largely to have been taken for granted. The present paper considers the precautionary motive for holding cash balances as one possible motivation for the currency substitution hypothesis. A three-asset model is presented in which transaction costs are explicit and an agent is faced with uncertain cash requirements in two different currencies. The role played by the expected rate of depreciation in the optimal portfolio allocation is found to conform with prior beliefs.
Publication Year: 1986
Publication Date: 1986-03-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 24
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