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Currency Substitution in a Transitional Economy with an Application to the Czech Republic

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  • Luboš Komárek
  • Martin Melecký

Abstract

Currency substitution appears to be an important issue affecting the design of monetary policy, especially in transition economies. This article strives to analyze the particular relevance of the currency substitution phenomenon in the Czech Republic. We initially discuss the role of currency substitution in small open economies in transition with some illustrations relating to the Czech Republic. We distinguish and analyze a locally and globally substituting currency from substituted ones and discuss the consequences of euroization. Further, we estimate a modified Branson and Henderson portfolio model for the Czech Republic. This provides a multiperspective approach to currency substitution in the broad sense. We attempt to improve the robustness of our estimations by applying several cointegration techniques, namely, the Johansen procedure, ARDL, DOLS, and ADL. Finally, we discuss the potential implications of currency and asset substitution according to our estimates for the Czech economy.

Suggested Citation

  • Luboš Komárek & Martin Melecký, 2003. "Currency Substitution in a Transitional Economy with an Application to the Czech Republic," Eastern European Economics, Taylor & Francis Journals, vol. 41(4), pages 72-99, July.
    • Handle: RePEc:mes:eaeuec:v:41:y:2003:i:4:p:72-99
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    1. repec:zbw:bofitp:2007_003 is not listed on IDEAS
    2. ?lyas ??klar & Veysel Karag?l & Suzan ?ahin, 2017. "Is There Any Meaningful Ratchet Effect in the Process of Currency Substitution? Evidence from Turkey," Business and Economic Research, Macrothink Institute, vol. 7(2), pages 146-162, December.
    3. Yu Hsing, 2006. "Tests of Functional Forms, Currency Substitution, and Capital Mobility of Czech Money Demand Function," Prague Economic Papers, Prague University of Economics and Business, vol. 2006(4), pages 291-299.
    4. 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.
    5. Harrison, Barry & Vymyatnina, Yulia, 2007. "Currency substitution in a de-dollarizing economy: the case of Russia," BOFIT Discussion Papers 3/2007, Bank of Finland Institute for Emerging Economies (BOFIT).
    6. Horváth, Roman & Komárek, Luboš & Rozsypal, Filip, 2011. "Does money help predict inflation? An empirical assessment for Central Europe," Economic Systems, Elsevier, vol. 35(4), pages 523-536.
    7. Jarko Fidrmuc, 2009. "Money demand and disinflation in selected CEECs during the accession to the EU," Applied Economics, Taylor & Francis Journals, vol. 41(10), pages 1259-1267.
    8. Lazea, Valentin & Cozmanca, Bogdan Octavian, 2003. "Currency substitution in Romania," MPRA Paper 19813, University Library of Munich, Germany.
    9. Harrison, Barry & Vymyatnina, Yulia, 2007. "Currency substitution in a de-dollarizing economy : the case of Russia," BOFIT Discussion Papers 3/2007, Bank of Finland, Institute for Economies in Transition.

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