Endogenous Currency Substitution, Inflationary Finance, And Welfare
In some countries a foreign currency has replaced the domestic one to perform the functions of money. This phenomenon is known as currency substitution. This paper explores the relationship between currency substitution and inflationary finance in an overlapping generations model in which currency substitution is an endogenous equilibrium outcome. The author describes when currency substitution may emerge and shows that it may be a purely expectational phenomenon. He uses the model to discuss the welfare effects of inflation and the effects of policies that deal directly with currency substitution CS. Copyright 1994 by Ohio State University Press.
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