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Hysteresis in a simple model of currency substitution

  • Uribe, Martin

A simple model of currency substitution is developed in which the private cost of performing transactions in the foreign currency depends upon the aggregate degree of dollarization. This feature generates multiple steady states and hysteresis in an otherwise standard cash-in-advance model of a small open economy. In particular, a temporary increase in the rate of inflation can drive the economy to a dollarized equilibrium in which the velocity of circulation of domestic currency is permanently higher.

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

Volume (Year): 40 (1997)
Issue (Month): 1 (September)
Pages: 185-202

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Handle: RePEc:eee:moneco:v:40:y:1997:i:1:p:185-202
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  3. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
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  17. Lieberman, Charles, 1977. "The Transactions Demand for Money and Technological Change," The Review of Economics and Statistics, MIT Press, vol. 59(3), pages 307-17, August.
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