Modelling money demand in open economies over the modern floating rate period

The role of open economy factors in influencing domestic money demand in major industrial countries over the modern floating rate period is examined. The theoretial model for the empirical analysis is derived from a general two-country portfolio balance framework that determines the demand for domestic and foreign monetary and non-monetary assets in each country. The ECM estimates indicate that capital mobility plays an important role in the money demand function in all seven counteries considered. Currency substitution, in contrast, is not an important phenomenon.