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van Huellen, Sophie, Qin, Duo, Lu, Shan, Wang, Huiwen, Wang, Qing Chao and Moraitis, Thanos (2022) 'Modelling Opportunity Cost Effects in Money Demand due to Openness.' International Journal of Finance and Economics, 27 (1). pp. 697-744.

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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.

Item Type: Journal Article
SOAS Departments & Centres: Departments and Subunits > Department of Economics
ISSN: 10991158
Copyright Statement: © 2020 The Authors.
DOI (Digital Object Identifier): https://doi.org/10.1002/ijfe.2175
Date Deposited: 07 Jul 2020 09:29
URI: https://eprints.soas.ac.uk/id/eprint/33183
Funders: Other

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