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The hysteresis of currency substitution: Currency risk vs. network externalities

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  • Valev, Neven T.
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    Abstract

    It is widely documented that currency substitution (using foreign money in transactions) increases in periods of high inflation but does not decline once inflation is reduced. The paper uses survey data from Bulgaria, which experienced this phenomenon, to investigate the origins of this ratchet effect. We find that expected devaluation of the domestic currency, while relatively high, does not play a major role in sustaining the dollarization of transactions. Conversely, preferences for the use of foreign money are strongly influenced by people's perception that foreign money is already widely used in the economy.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 29 (2010)
    Issue (Month): 2 (March)
    Pages: 224-235

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    Handle: RePEc:eee:jimfin:v:29:y:2010:i:2:p:224-235

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Currency substitution Dollarization Hysteresis;

    References

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    Cited by:
    1. Brown, Martin & De Haas, Ralph & Sokolov, Vladimir, . "Regional Inflation and Financial Dollarization," Working Papers on Finance 1327, University of St. Gallen, School of Finance.
    2. Brown, M. & Haas, R. de & Sokolov, V., 2013. "Regional Inflation and Financial Dollarization," Discussion Paper 2013-073, Tilburg University, Center for Economic Research.

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