Demand and Supply Functions for Stocks of Euro-Dollar Deposits: An Empirical Study

Abstract

T HIS study considers the market for Eurodollar deposits as a structural system with determinate demand and supply relationships. It is important at the outset to distinguish the stock demand for Euro-dollar deposits, which we shall be investigating here, from the flow demand for Euro-dollar credit. Machlup (1970) points out that the demand for Euro-dollar credit is a demand for a flow of funds to borrowers who, in turn, plan to pay out the funds they have borrowed. The demand for Euro-dollar deposit balances is, on the other hand, a demand for money, or near-money, to hold. We shall be concentrating upon the factors affecting the demand for a stock of Eurodollar deposits to hold.1 Since we shall not be taking the stock of Euro-dollar deposits in existence at a point in time as exogenously given, we shall also be identifying an equation to determine the stock of Euro-dollar balances supplied by Euro-dollar issuing institutions (hereafter Euro-banks). This will be based on an identifiable stock of reserves held by Euro-banks. Briefly, the procedure and results are as follows. Quarterly data from 1964-III through 1970-IV are employed to obtain parameter estimates for scale and substitution arguments in a stock demand function for Euro-dollar deposit balances as well as to obtain an estimated equation for the stock of dollar claims produced by Euro-banks. The empirical results suggest that a stable stock-demand function for Euro-dollar deposit balances exists along with a stable stock-supply function for Eurodollar deposits. The results also suggest that about 40 per cent of the growth of Euro-dollar deposits in the 1964-III 1970-IV period was due to the multiple deposit expansion process.