Determinants of currency substitution and money demand in the Russian Federation

The transition of the Russian monetary system from a mere accounting system into a fully functioning modern currency to support the emerging market economy is confronted by competition from both foreign currencies from abroad and non-monetary surrogates from within. This dissertation attempts to give historical perspective to the issues confronted by the struggling ruble and to apply modern tools of econometric analysis to clarify the relationships between the Russian ruble and the determinants of currency substitution and money demand.; The paper begins with a general survey of the currency substitution and money demand literature covering major theoretical and empirical developments in both developed and developing countries. The macroeconomic costs of currency substitution that motivate the study are considered.; The empirical chapters of this dissertation consider empirical models of money demand and currency substitution in the Russian Federation. These are estimated using Johansen's cointegration analysis and the LSE (London School of Economics) general to specific modeling methodology. Estimations were generated using Hendry and Doornik's software package PcGive and Pc FIML 9.3. Chapter 7 estimates approximate parameters for a long run money demand function using Johansen's cointegration methods: the M2 and GKO variables are found to be cointegrated with a cointegrating vector of (1, 0.025). The determinants of the money demand function are tested and found to be weakly exogenous for the parameters of interest. Therefore, a conditional single equation is estimated for inference. M2 and GKO rates are found to be robust under both estimation procedures.; Using the LSE general to specific modeling methodology a long run equilibrium correction relationship is estimated between variables of currency substitution ratios and its determinants: the expected rate of depreciation and a trade weighted scale variable. Four separate vector autoregressions are considered that correspond to the two measures of the currency substitution ratio and the two proxies for the expected rate of depreciation. A robust estimate for the semi-elasticity, 0.10, of the expected rate of depreciation on the currency substitution ratio is found. An adjustment feedback term suggests that a third of the disequilibrium is corrected by a monthly change in the currency substitution ratio.