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Currency Substitution

Author

Listed:
  • Giovannini, Alberto
  • Turtelboom, Bart

Abstract

This paper reviews the extensive theoretical and empirical literature on currency substitution. After discussing the ambiguity surrounding the definition of currency substitution, the paper illustrates the causes of substitutability of different currencies using a cash-in-advance model and a model where money yields liquidity services. The effects of currency substitutability on exchange rates, international adjustment and the inflation tax are discussed. The paper also reviews the empirical facts on the size of currency substitution in developed and developing countries. Whereas currency substitution is found to be sizeable in some developing countries and on the rise in the European Community, estimates of the ability to substitute foreign for domestic currency are often found to be unreliable due to data, methodological and conceptual problems. Policy implications of currency substitution for international monetary cooperation and inflationary finance are explored.

Suggested Citation

  • Giovannini, Alberto & Turtelboom, Bart, 1993. "Currency Substitution," CEPR Discussion Papers 759, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:759
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    Citations

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    Cited by:

    1. Mr. Subramanian S Sriram, 1999. "Survey of Literature on Demand for Money: Theoretical and Empirical Work with Special Reference to Error-Correction Models," IMF Working Papers 1999/064, International Monetary Fund.
    2. Policy Analyst - UNICEF Zimbabwe, 2002. "Evidence on the demand for money function in Uganda," Development and Comp Systems 0210005, University Library of Munich, Germany.

    More about this item

    Keywords

    Currency Substitution; Dollarization; Foreign Currency Deposits; Liquidity; Money Demand;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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