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Currency Substitution and Vehicle Currencies: Tests of Alternative Hypotheses for the Dollar, DM and Yen


  • Thomas, Stephen H
  • Wickens, Michael R.


Recent concern about the difficulty of obtaining structurally stable models of money demand combined with the removal of capital controls have drawn attention to the theory of currency substitution (CS). The purpose of this paper is to examine whether CS is a relevant factor in the demand for currency. A number of different theories are considered. The traditional approach to the demand for money focuses on the domestic holding. In contrast CS is concerned with both domestic and foreign holding of domestic currency, and with the substitutability between domestic and foreign currencies. Often it is not realized that there are various CS theories and they give different predictions. CS theories can be supplemented by the theory of vehicle currencies which emphasizes the use of a currency in international transactions by third-party countries. In this paper all of these theories are tested using alternative definitions of money, including both resident and non-resident holding, for data on the US dollar, the yen and the deutschmark. The evidence provides support for both CS and vehicle-currency effects but more in non-resident than resident currency holdings.

Suggested Citation

  • Thomas, Stephen H & Wickens, Michael R., 1991. "Currency Substitution and Vehicle Currencies: Tests of Alternative Hypotheses for the Dollar, DM and Yen," CEPR Discussion Papers 507, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:507

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    Cited by:

    1. Miguel Lebre de Freitas, 2006. "Eu-Wide Money And Currency Substitution," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(4), pages 48-63, November.
    2. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.


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