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The Demand for Currency Substitution

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  • John J. Seater

    ()
    (North Carolina State University, USA)

Abstract

A transactions model of the demand for multiple media of exchange is developed. Some results are expected, and others are both new and surprising. There are both extensive and intensive margins to currency substitution, and inflation may affect the two margins differently, leading to subtle incentives to adopt or abandon a substitute currency. Variables not previously considered in the literature affect currency substitution in complex and somewhat unexpected ways. In particular, the level of income and the composition of consumption expenditures are important, and they interact with the other variables in the model. Independent empirical work provides support for the theory.

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Bibliographic Info

Article provided by Savez ekonomista Vojvodine, Novi Sad, Serbia in its journal Panoeconomicus.

Volume (Year): 55 (2008)
Issue (Month): 4 (December)
Pages: 405-437

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Handle: RePEc:voj:journl:v:55:y:2008:i:4:p:405-437

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Web page: http://www.panoeconomicus.rs/

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Keywords: Currency substitution; Dollarization;

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References

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  1. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
  2. Barro, Robert & Alesina, Alberto, 2002. "Currency Unions," Scholarly Articles 4551795, Harvard University Department of Economics.
  3. Anthony M. Santomero & John J. Seater, 1995. "Alternative Monies and the Demand for Media of Exchange," Center for Financial Institutions Working Papers 96-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416.
  5. Helmut Stix, 2008. "Euroization: What Factors drive its Persistence?," Working Papers 140, Oesterreichische Nationalbank (Austrian Central Bank).
  6. Anthony M. Santomero & John J. Seater, 1997. "Monies and Banking," Center for Financial Institutions Working Papers 97-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Miguel A. Savastano, 1996. "Dollarization in Latin America," IMF Working Papers 96/4, International Monetary Fund.
  8. Ireland, Peter N, 1995. "Endogenous Financial Innovation and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 107-23, February.
  9. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-75, August.
  10. Edgar L. Feige & Michael Faulend & Velimir Sonje & Vedran Sosic, 2001. "Currency Substitution, Unoffical Dollarization and Estimates of Foreign Currency Held Abroad: The Case of Croatia," International Finance 0106001, EconWPA.
  11. Howitt, Peter & Clower, Robert, 2000. "The emergence of economic organization," Journal of Economic Behavior & Organization, Elsevier, vol. 41(1), pages 55-84, January.
  12. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June.
  13. Ilker Domac & Mohsen Bahmani-Oskooee, 2002. "On the Link between Dollarization and Inflation : Evidence from Turkey," Discussion Papers 0207, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  14. Pablo E. Guidotti & Carlos A. Rodriguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 518-544, September.
  15. Dotsey, Michael, 1988. "The Demand for Currency in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 22-40, February.
  16. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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Cited by:
  1. Helmut Stix, 2008. "Euroization: What Factors drive its Persistence?," Working Papers 140, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Helmut Stix, 2012. "Why Do People Save in Cash? Distrust, Memories of Banking Crises, Weak Institutions and Dollarization," Working Papers 178, Oesterreichische Nationalbank (Austrian Central Bank).
  3. Adenutsi, Deodat E. & Yartey, Charles A., 2007. "Financial sector development and the macrodynamics of ‘de facto’ dollarisation in developing countries: the case of Ghana," MPRA Paper 29333, University Library of Munich, Germany.
  4. Edlira Narazani, 2013. "A Micro Level Perspective of Euroization in Albania," wiiw Balkan Observatory Working Papers 109, The Vienna Institute for International Economic Studies, wiiw.

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