Can Currency Demand Be Stable Under a Financial Crisis? the Case of Mexico

Author/Editor:

May Y Khamis ; Alfredo Mario Leone

Publication Date:

April 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper finds strong evidence that real currency demand in Mexico remained stable throughout and after the financial crisis in Mexico. Cointegration analysis using the Johansen-Juselius technique indicates a strong cointegration relationship between real currency balances, real private consumption expenditures, and the interest rate. The dynamic model for real currency demand exhibits significant parameter constancy even after the financial crisis as indicated by a number of statistical tests. The paper concludes that the significant reduction in real currency demand under the financial crisis in Mexico could be appropriately explained by the change in the variables that historically explained the demand for real cash balances in Mexico. This result supports the Bank of Mexico’s use of a reserve money program to implement monetary policy under the financial crisis.

Series:

Working Paper No. 1999/053

Subject:

Currencies Financial crises Financial services Inflation Money National accounts Prices Private consumption Real interest rates

English

Publication Date:

April 1, 1999

ISBN/ISSN:

9781451847369/1018-5941

Stock No:

WPIEA0531999

Pages:

26

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