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Currency Substitution in the Transition Economy : A Case of the Czech Republic 1993-2001

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  • Komárek Luboš
  • Melecký Martin

Abstract

Currency substitution appears to be an important issue affecting the design of monetary policy, especially in transition economies. Therefore, this paper strives to analyze the particular relevance of a currency substitution phenomenon for the Czech Republic is case. We initially discuss various approaches and definitions of currency substitution that found in the literature. Subsequently, we discuss the role of currency substitution in small open economies in transition with some illustrations relating to the Czech Republic - we distinguish and analyse a locally and globally substituting currency from a substituted one and consequences of euroization. The empirical part of this paper presents estimations of modified Branson and Henderson portfolio model for the Czech Republic’s case. This provides a multi-perspective approach to currency substitution in a broad sense. Further, we attempt to intensify the robustness of our estimation, applying several cointegration techniques. These are namely the Johansen procedure, the ARDL, the DOLS and the ADL. Finally, we discuss potential implications of currency and assets substitution according to our estimates present in the Czech economy.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 613.

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Length: 37 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:wrk:warwec:613

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Keywords: Currency substitution ; demand for money ; transition ; Czech Republic ; cointegration;

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References

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  1. Nouriel Roubini & Vittorio Grilli, 1995. "Liquidity Models in Open Economies: Theory and Empirical Evidence," NBER Working Papers 5313, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Arrau, Patricio & DeGregorio, Jose & Wickham, Peter, 1991. "The demand for money in developing countries: Assessing the role of financial innovation," MPRA Paper 13691, University Library of Munich, Germany.
  3. Jose De Gregorio & Peter Wickham & Patricio Arrau & Carmen Reinhart, 1991. "The Demand for Money in Developing Countries," IMF Working Papers 91/45, International Monetary Fund.
  4. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
  5. Liliana Rojas-Suárez, 1992. "Currency Substitution and Inflation in Peru," IMF Working Papers 92/33, International Monetary Fund.
  6. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  7. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416.
  8. Carlos A. Végh Gramont & Ratna Sahay, 1995. "Dollarization in Transition Economies," IMF Working Papers 95/96, International Monetary Fund.
  9. Canzoneri, Matthew B. & Diba, Behzad T., 1992. "The inflation discipline of currency substitution," European Economic Review, Elsevier, vol. 36(4), pages 827-845, May.
  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. Casey B. Mulligan & Xavier Sala-i-Martin, 1996. "Adoption of Financial Technologies: Implications for Money Demand and Monetary Policy," NBER Working Papers 5504, National Bureau of Economic Research, Inc.
  12. Federico A. Sturzenegger, 1992. "Currency Substitution and the Regressivity of Inflationary Taxation," UCLA Economics Working Papers 656, UCLA Department of Economics.
  13. Handa, Jagdish & Bana, Ismail Mohamed, 1990. "Currency Substitution and Transactions Costs," Empirical Economics, Springer, vol. 15(3), pages 231-43.
  14. Sarajevs, Vadims, 2000. "Econometric Analysis of Currency Substitution: A Case of Latvia," BOFIT Discussion Papers 4/2000, Bank of Finland, Institute for Economies in Transition.
  15. Brian M. Doyle, 2000. ""Here, dollars, dollars ..."estimating currency demand and worldwide currency substitution," International Finance Discussion Papers 657, Board of Governors of the Federal Reserve System (U.S.).
  16. Sahay, Ratna & Vegh, Carlos, 1995. "Dollarization in transition economies: Evidence and policy implications," MPRA Paper 20490, University Library of Munich, Germany.
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Cited by:
  1. Lula G. Mengesha & Mark J. Holmes, 2013. "Does Dollarization Alleviate Or Aggravate Exchange Rate Volatility?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 99-118, June.

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