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Currency Substitution

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  • Giovannini, Alberto
  • Turtelboom, Bart
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    Abstract

    This paper reviews the extensive theoretical and empirical literature on currency substitution. After discussing the ambiguity surrounding the definition of currency substitution, the paper illustrates the causes of substitutability of different currencies using a cash-in-advance model and a model where money yields liquidity services. The effects of currency substitutability on exchange rates, international adjustment and the inflation tax are discussed. The paper also reviews the empirical facts on the size of currency substitution in developed and developing countries. Whereas currency substitution is found to be sizeable in some developing countries and on the rise in the European Community, estimates of the ability to substitute foreign for domestic currency are often found to be unreliable due to data, methodological and conceptual problems. Policy implications of currency substitution for international monetary cooperation and inflationary finance are explored.

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    File URL: http://www.cepr.org/pubs/dps/DP759.asp
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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 759.

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    Date of creation: Apr 1993
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    Handle: RePEc:cpr:ceprdp:759

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    Related research

    Keywords: Currency Substitution; Dollarization; Foreign Currency Deposits; Liquidity; Money Demand;

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    Cited by:
    1. Policy Analyst - UNICEF Zimbabwe, 2002. "Evidence on the demand for money function in Uganda," Development and Comp Systems 0210005, EconWPA.
    2. Subramanian S. Sriram, 1999. "Survey of Literatureon Demand for Money," IMF Working Papers 99/64, International Monetary Fund.

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