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Currency Substitution

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  • Benedict J. Clements
  • Gerd Schwartz
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    Abstract

    This paper analyzes the determinants of currency substitution in Bolivia in the period following the 1984/85 hyperinflation. We find that expected exchange rate depreciation and actual interest rate differentials between boliviano and dollar deposits in the Bolivian banking system are statistically significant determinants of the degree of currency substitution. However, the explanatory power of these variables is low compared to variables that measure the degree of inertia in the currency substitution process. Thus, further reductions in inflation or higher interest rates for boliviano bank deposits are likely to have but a small effect on dollarization.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/65.

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    Length: 32
    Date of creation: 01 Aug 1992
    Date of revision:
    Handle: RePEc:imf:imfwpa:92/65

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    Related research

    Keywords: Currency substitution; Economic models; foreign currency; inflation; exchange rate; inflation rates; exchange rates; low inflation; inflation rate; exchange rate depreciation; current exchange rates; macroeconomic stability; exchange rate expectations; rate of inflation; monetary policy; foreign exchange; real rates; money supply; nominal interest rate; flexible exchange rates; exchange rate behavior; exchange rate devaluation; economic instability; exchange rate devaluations; exchange rate expectation; high inflation; high rates of inflation; rates of inflation; real exchange rate; market exchange rates; exchange rate volatility;

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    Cited by:
    1. Steven B. Kamin & Neil R. Ericsson, 1993. "Dollarization in Argentina," International Finance Discussion Papers 460, Board of Governors of the Federal Reserve System (U.S.).
    2. Kem Reat Viseth, 2001. "Currency Substitution and Financial Sector Developments in Cambodia," International and Development Economics Working Papers idec01-4, International and Development Economics.
    3. Alami, Tarik H., 2001. "Currency substitution versus dollarization: A portfolio balance model," Journal of Policy Modeling, Elsevier, vol. 23(4), pages 473-479, May.
    4. Pere Gomis-Porqueras & Carlos Serrano & Alejandro Somuano, 2005. "Dollar-denominated accounts in Latin America during the 1990s," Journal of Economics and Finance, Springer, vol. 29(2), pages 259-270, June.
    5. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
    6. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.
    7. Luis Arce Catacora, 2001. "Incertidumbre y dolarización en Bolivia," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 4(2), pages 31-56, December.
    8. Kari Heimonen, 2006. "The Dynamics of Currency Substitution: Evidence from UK Foreign Currency Balances," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(1), pages 61-74, April.
    9. Adeniji, Sesan, 2013. "Investigating the Relationship between Currency Substitution, Exchange Rate and Inflation in Nigeria: An Autoregressive Distributed Lag (ARDL) Approach," MPRA Paper 52551, University Library of Munich, Germany, revised 28 Dec 2013.

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