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An empirical study on the hysteresis of currency substitution in Cambodia

  • Samreth, Sovannroeun

This paper examines whether the currency substitution (CS) phenomenon in Cambodia is in a hysteresis state. We employ a simple model of money-in-the-utility function with two currencies (home and foreign), in which the effect of network externalities on the use of foreign currency is taken into account. The equation derived from the model is estimated using the autoregressive distributed lag approach to cointegration for the period from June 1993 to June 2009. Our estimation results indicate that (1) there exists a stable, long-run relationship among the variables considered, (2) the CS ratio increases when people expect a higher rate of depreciation in the exchange rate, and most importantly, (3) there is evidence supporting the existence of a network externality, thereby implying the hysteresis of the CS phenomenon in Cambodia. Given the characteristics of the CS process in Cambodia, any measure or policy option to bring down the CS degree must be carefully considered.

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Article provided by Elsevier in its journal Journal of Asian Economics.

Volume (Year): 22 (2011)
Issue (Month): 6 ()
Pages: 518-527

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Handle: RePEc:eee:asieco:v:22:y:2011:i:6:p:518-527
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