CURRENCY SUBSTITUTION AND MONETARY AUTONOMY - THE FOREIGN-DEMAND FOR UNITED-STATES DEMAND DEPOSITS

This paper presents new evidence of currency substitution using the two-step estimator of cointegrated systems developed by Engle and Granger (1987). We estimate and find cointegration among variables suggested by the money-services model of currency substitution. Following Engle et al. (1989), we estimate an error correction model for each of five countries, allowing isolation of long-term from short-term influences on the foreign demand for US demand deposits. Our results suggest that currency substitution is a potentially significant phenomenon influencing long-term monetary policy independence. © 1990.