Abstract
This paper derives and tests the restrictions implied by an optimizing model of currency substitution under nonexpected utility using quarterly data for Israel from 1978 to 1988. We find that the elasticity of intertemporal substitution is less than one, the elasticity of currency substitution is greater than one, relative risk aversion is about seven, and the elasticity of currency substitution is greater than the intratemporal elasticity of substitution between consumption and liquidity services. In most cases the evidence supports the hypothesis of nonexpected utility as well as the inclusion of liquidity services in the representative agent's objective function. The methodology of this paper can be applied to other interesting cases of currency substitution. Copyright 1993 by Ohio State University Press.
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