McKinnon's currency substitution hypothesis: some new evidence

Abstract

This paper tests the hypothesis advanced particularly by McKinnon that the U.S. economy is strongly affected by the world supply of money and the U.S. effective exchange rate while the domestic money supply is of minor importance. This currency substitution hypothesis is tested using monthly data for the floating exchange rate period 1973 - 1989. The empirical results give clear support to McKinnon's hypothesis.