Currency Substitution in Laos |
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| Authors: | Inthiphone Xaiyavong Toshihisa Toyoda |
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| Affiliation: | 1. Monetary Policy Department, Bank of the Lao PDR, Vientiane Capital, Lao PDR;2. Kobe University and Hiroshima Shudo University, Nada‐ku, Kobe, Japan |
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| Abstract: | This study investigates the determinants of currency substitution in Laos based on the function of money demand. The empirical model is estimated using the autoregressive distributed lag approach to cointegration for the period 1993–2012. Our estimation results indicate that the interest rate differential is a significant currency substitution determinant in the Laos economy. Moreover, there is evidence supporting the existence of a ratchet effect in the currency allocation of deposits, implying that particularly strong policies should be pursued over an extended period of time in order to convince depositors to switch back to kip‐denominated assets. |
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| Keywords: | currency substitution error‐correction model Laos |
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