Specification Tests of the Money Demand Function in an Open Economy

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Abstract
This paper addresses empirically the issues of selecting the appropriate opportunity cost and scale variables of the money demand function in the presence of alternative nonnested hypotheses. As part of the process of model specification, the role of currency substitution in the demand for money function in an open economy is examined. The tests are carried out with quarterly data from the open economy of Greece over the floating exchange rate period 1975-82.

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