John Paleologos, Ph.D, Economics, University of Piraeus, 80, Karaoli & Dimitriou Str., Piraeus, 18534, Greece, Christos Papazoglou, Ph.D, European and International Studies, Panteion University, 12, Kondyli, Alimos, 17455, Greece, and Grigorios Bitzis, Msc., Economics, University of Pireus, 24, Theatrou, Piraeus, 18534, Greece.
In this paper we investigate empirically, the money demand and currency substitution between euro area and some selected countries. The euro area money demand is derived from money demand model with the United Kingdom, Norway, Sweden, Denmark and Japan, which are the foreign economies, using quarterly data covering the 1995Q1-2006Q4 period. Initially, we tested for the existence of structural breaks (breakpoint Chow test, figures of recursive residuals), and we can find two structural breaks in examined period. The first structural break occurred during the time period 1999Q1 – 1999Q3, and the second structural break occurred in 2005Q4. The existence of structural breaks let us to consider two sub-periods: 1995Q1-1999Q3 and 1999Q4-2006Q4. In the first sub-period, we can see a relative stable demand function, while in the second sub-period we see a less stable demand function. Moreover, we use a multivariate vector autoregressive analysis (MVAR analysis) in the money demand function. For all countries in the demand function, all variables which included in the long-run relationship are statistically significant. Finally, the results from MVAR analysis reveal significant degree of monetary interdependence during the second sub-period stemming from currency substitution.