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Currency Substitution

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Author Info
Alberto Giovannini
Bart Turtelboom
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 sizable 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4232.

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Date of creation: Dec 1992
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Handle: RePEc:nbr:nberwo:4232

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Edward F. Buffie, 2003. "Tight Money, Real Interest Rates, and Inflation in Sub-Saharan Africa," IMF Staff Papers, Palgrave Macmillan Journals, vol. 50(1), pages 6. [Downloadable!] (restricted)
  2. Randall Wright & Alberto Trejos, 2001. "International Currency," Advances in Macroeconomics, Berkeley Electronic Press, vol. 1(advances/), pages 1020-1020. [Downloadable!] (restricted)
  3. Jill A. Holman, 2000. "Government budgetary policies, economic growth, and currency substitution in a small open economy," Research Working Paper RWP 00-08, Federal Reserve Bank of Kansas City. [Downloadable!]
  4. Kem Reat Viseth, 2001. "Currency Substitution and Financial Sector Developments in Cambodia," International and Development Economics Working Papers idec01-4, International and Development Economics. [Downloadable!]
  5. Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS. [Downloadable!]
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