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The Demand for Currency Substitution

  • Seater, John J.

A transactions model of the demand for multiple media of exchange is developed. Some results are expected, and others are both new and surprising. There are both extensive and intensive margins to currency substitution, and inflation may affect the two margins differently, leading to subtle incentives to adopt or abandon a substitute currency. Variables not previously considered in the literature affect currency substitution in complex and somewhat unexpected ways. In particular, the level of income and the composition of consumption expenditures are important, and they interact with the other variables in the model. Independent empirical work provides support for the theory.

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2008-35
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File URL: http://econstor.eu/bitstream/10419/27519/1/economics_2008-35.pdf
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Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 2 (2008)
Issue (Month): ()
Pages: 1-30

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Handle: RePEc:zbw:ifweej:7402
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  1. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  2. Helmut Stix, 2008. "Euroization: What Factors drive its Persistence?," Working Papers 140, Oesterreichische Nationalbank (Austrian Central Bank).
  3. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June.
  4. Alberto Alesina & Robert J. Barro, 2000. "Currency Unions," NBER Working Papers 7927, National Bureau of Economic Research, Inc.
  5. Santomero, Anthony M & Seater, John J, 1996. "Alternative Monies and the Demand for Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 942-60, November.
  6. Anthony M. Santomero & John J. Seater, 1997. "Monies and Banking," Center for Financial Institutions Working Papers 97-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. 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.
  8. Pablo Emilio Guidotti & Carlos A. Rodriguez, 1991. "Dollarization in Latin America; Gresham's Law in Reverse?," IMF Working Papers 91/117, International Monetary Fund.
  9. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
  10. Miguel A. Savastano, 1996. "Dollarization in Latin America; Recent Evidence and Some Policy Issues," IMF Working Papers 96/4, International Monetary Fund.
  11. Ireland, Peter N, 1995. "Endogenous Financial Innovation and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 107-23, February.
  12. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-75, August.
  13. Howitt, Peter & Clower, Robert, 2000. "The emergence of economic organization," Journal of Economic Behavior & Organization, Elsevier, vol. 41(1), pages 55-84, January.
  14. Dotsey, Michael, 1988. "The Demand for Currency in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 22-40, February.
  15. Ilker Domac & Mohsen Bahmani-Oskooee, 2002. "between Dollarization and Inflation : Evidence from Turkey," Discussion Papers 0207, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  16. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416.
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