The money demand and the loss of interest for the euro in Romania

ABSTRACT

We generalize a money demand micro-founded model to explain Romanians’ recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu. Our empirical findings also suggest that the two currencies are rather complements than substitutes, providing thus evidence for a reduced level of monetary integration of Romania with the Euro area. These results put into question the interest for the euro adoption in the next period.

KEYWORDS:

• Money demand
• open economy model
• currency substitution effect
• monetary integration
• Romania

JEL CLASSIFICATION:

• E41
• E52
• P34

Acknowledgements

This work was supported by a grant of the Romanian National Authority for Scientific Research and Innovation, CNCS – UEFISCDI, project number PN-II-RU-TE-2014-4-1760.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ While currency substitution represents the willingness of residents to replace domestic money with foreign currencies depending on their relative rate of return, the currency complementarity shows that agents hold domestic and foreign money in fixed proportions. This means that the relative demand for domestic and foreign money is not influenced by the difference between the domestic and foreign interest rates.

² In Albulescu, Pépin, and Miller (2017), the relative liquidity degree of the euro against that of the leu is assumed to be fixed.

Additional information

Funding

This work was supported by a grant of the Romanian National Authority for Scientific Research and Innovation, CNCS – UEFISCDI, project number PN-II-RU-TE-2014-4-1760.