Exchange-rate uncertainty and dollarization: a structural vector error correction approach to estimating money demand

Open economy money demand functions for Singapore are estimated using quarterly data from 1973-1996. Variance decompositions derived from structural vector error correction models are used to test the effect of anticipated exchange rate movements and exchange rate uncertainty on money demand. Though no evidence was found for currency substitution and dollarization with respect to the US dollar, it was found that Singapore's money demand is affected by variations in exchange rate uncertainty with respect to the Japanese yen.