Exchange Rate Volatility and the extent of Currency Substitution in Nigeria
AbstractThis study tests for the existence of currency substitution and attempts to gauge its magnitude in Nigeria. The analysis was based on a multi-perspective unrestricted portfolio balance model. The stock of foreign currency deposits in Nigeria and the ratio of deposits denominated in foreign currency in the domestic banking system to deposits denominated in the domestic currency were modelled. First, the study revealed the presence of currency substitution in the domestic banking system in Nigeria. A major factor driving this process was exchange rate volatility especially real parallel market exchange rate volatility. Also, the study demonstrates that currency substitution in Nigeria was low during the period under review and as such classified Nigeria as moderately dollarized economy. Subsequently, alternative policy options for curtailing currency substitution in Nigeria were explored. The study concludes that currency substitution is an element of Nigerians’ behaviour concerning wealth allocation and as such macroeconomic policies that ensure long periods of low inflation and exchange rate stability become the most powerful policy option that could help stabilize or reduce currency substitution. Also very paramount are the development of domestic financial markets with relevant infrastructural facilities and the development of new financial instruments, which will serve as alternatives to holding money in the domestic economy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 16257.
Date of creation: 2008
Date of revision:
Publication status: Published in Indian Economic Review Issue No. 2..Vol. X(2008): pp. 161-181
Demand for money; Exchange Rate Volatility; Currency Substitution; Macroeconomic Aspects of International Trade and Finance; Nigeria;
Other versions of this item:
- Yinusa D. O. & A. E. Akinlo, 2008. "Exchange Rate Volatility and the Extent of Currency Substitution in Nigeria," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 43(2), pages 161-181, December.
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
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.:
- William H. Branson & Dale W. Henderson, 1984.
"The Specification and Influence of Asset Markets,"
NBER Working Papers
1283, National Bureau of Economic Research, Inc.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- 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.
- Miguel A. Savastano, 1996. "Dollarization in Latin America," IMF Working Papers 96/4, International Monetary Fund.
- Mizen, Paul & Pentecost, Eric J, 1994. "Evaluating the Empirical Evidence for Currency Substitution: A Case Study of the Demand for Sterling in Europe," Economic Journal, Royal Economic Society, vol. 104(426), pages 1057-69, September.
- Girton, Lance & Roper, Don E, 1981. "Theory and Implications of Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(1), pages 12-30, February.
- Joannes Mongardini & Johannes Mueller, 2000. "Ratchet Effects in Currency Substitution: An Application to the Kyrgyz Republic," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 3.
- Luboš KomÃ¡rek & Martin Meleck�, 2003. "Currency Substitution in a Transitional Economy with an Application to the Czech Republic," Eastern European Economics, M.E. Sharpe, Inc., vol. 41(4), pages 72-99, July.
- Yinusa, D. Olalekan, 2009. "Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data," MPRA Paper 16259, University Library of Munich, Germany, revised 2009.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.