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Currency substitution and nonlinear error correction in Taiwan's demand for broad money

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We modify the conventional money demand function by including a real exchange rate variable to reflect the effect of currency substitution. Empirical evidence indicates that the variable is crucial to the long-run stability of Taiwan's money demand. After finding the failure of a linear error-correction model (ECM) in describing the dynamics of Taiwan's money demand, we apply a nonlinear ECM to examine its dynamics and support the appropriateness of the nonlinear model empirically.

Document Type: Research Article


Affiliations: 1: Institute of Economics, National Sun Yat-Sen University, Kaohsiung, Taiwan,Department of Economics, National Chung-Cheng University, Chia-Yi, Taiwan 2: Department of Economics, National Chung-Cheng University, Chia-Yi, Taiwan,Department of International Trade, Cheng-Shiu Technological University, Kaohsiung, Taiwan

Publication date: July 1, 2007

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