Currency substitution and the demand for monetary assets in Canada: An application of the Fourier flexible form.

摘要

The purpose of this study is to determine whether U.S. dollar-denominated assets held in Canadian commercial banks act as substitutes to a range of Canadian dollar-denominated assets. These assets are: currency plus demand deposits, checkable personal savings deposits, noncheckable personal savings deposits, fixed-term personal savings deposits, and Canadian Savings Bonds. We also examine the relationship between currency plus demand deposits and the other domestic assets.; The model employed is the Fourier flexible form, which allows the tracking of the parameter of interest--the Allen Elasticity of Substitution (AES)--over time. The Fourier is a global approximation method, and the results are compared with a local approximation method--the Translog.; The results show U.S. dollar-denominated assets behave like substitutes within our framework, but this relationship is not constant over time. In addition, the other assets were not found to be perfect substitutes to the main transaction account M1 (currency plus demand deposits). Considerable variability of the elasticities of substitution is found during the period of high interest rates in Canada (1979-1982).