Modelling opportunity cost effects in money demand due to openness

Sophie Van Huellen, Duo Qin, Shan Lu, Huiwen Wang, Qing Chao Wang, Thanos Moraitis

Research output: Contribution to journalArticlepeer-review

Abstract

We apply a novel model-based approach to constructing composite international financial indices (CIFIs) as measures of opportunity cost effects that arise due to openness in money demand models. These indices are tested on the People’s Republic of China (PRC) and Taiwan Province of China (TPC), two economies which differ substantially in size and degree of financial openness. Results show that (a) stable money demand equations can be identified if accounting for foreign opportunity costs through CIFIs, (b) the monetary policy intervention in the PRC over the global financial crisis period temporarily mitigated disequilibrating foreign shocks to money demand, (c) CIFIs capture opportunity costs due to openness more adequately than commonly used US interest rates and (d) CIFI construction provides valuable insights into the channels through which foreign financial markets affect domestic money demand.
Original languageEnglish
Number of pages48
JournalInternational Journal of Finance and Economics
DOIs
Publication statusPublished - 1 Aug 2020

Research Beacons, Institutes and Platforms

  • Global Development Institute

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