Modelling Opportunity Cost Effects in Money Demand due to Openness

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

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.

Citation

van Huellen, S., Qin, D., Lu, S., Wang, H., Wang, Q. C., & Moraitis, T. (2022). Modelling Opportunity Cost Effects in Money Demand due to Openness. International Journal of Finance & Economics, 27(1), 697-744. https://doi.org/10.1002/ijfe.2175

• Journal Article Type: Article
• Acceptance Date: Jul 6, 2020
• Online Publication Date: Aug 1, 2020
• Publication Date: Jan 1, 2022
• Deposit Date: Jul 7, 2020
• Publicly Available Date: Jul 7, 2020
• Journal: International Journal of Finance and Economics
• Print ISSN: 1076-9307
• Electronic ISSN: 1099-1158
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 27
• Issue: 1
• Pages: 697-744
• DOI: https://doi.org/10.1002/ijfe.2175
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2175