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Endogenous Currency Substitution, Inflationary Finance, And Welfare

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  • Chang, Roberto

Abstract

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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Suggested Citation

  • Chang, Roberto, 1989. "Endogenous Currency Substitution, Inflationary Finance, And Welfare," Working Papers 89-12, C.V. Starr Center for Applied Economics, New York University.
  • Handle: RePEc:cvs:starer:89-12
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    File URL: http://econ.as.nyu.edu/docs/IO/9394/RR89-12.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings 196, Econometric Society.
    2. Özbilgin, Murat H., 2012. "Currency substitution, inflation, and welfare," Journal of Development Economics, Elsevier, pages 358-369.
    3. repec:dau:papers:123456789/11496 is not listed on IDEAS
    4. Martin, Antoine, 2006. "Endogenous Multiple Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 245-262, February.
    5. Soller Curtis, Elisabeth & Waller, Christopher J., 2000. "A search-theoretic model of legal and illegal currency," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 155-184, February.
    6. Yinusa, D. Olalekan, 2009. "Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data," MPRA Paper 16259, University Library of Munich, Germany, revised 2009.
    7. Lebre de Freitas, M., 2004. "The dynamics of inflation and currency substitution in a small open economy," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 133-142, February.
    8. Reza Y. Siregar & Narith Chan, 2014. "Factors behind Foreign Currency Holding by Household in Cambodia," CAMA Working Papers 2014-58, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    9. Miguel Lebre de Freitas & Francisco José Veiga, 2006. "Currency substitution, portfolio diversification, and money demand," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 719-743, August.
    10. Gustavo Suárez R., 1999. "Tecnología de transacciones endógena y los costos de la inflación," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 0(35), pages 55-85, Junio.
    11. Oscar J. Arce, 2006. "Speculative Hyperinflations: When Can We Rule Them Out?," Computing in Economics and Finance 2006 376, Society for Computational Economics.
    12. Kyriakos C. Neanidis & Christos S. Savva, 2006. "The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies," The School of Economics Discussion Paper Series 0609, Economics, The University of Manchester.
    13. Roberto Chang, 2000. "Dollarization: a scorecard," Economic Review, Federal Reserve Bank of Atlanta, pages 1-12.
    14. Camera, Gabriele & Craig, Ben & Waller, Christopher J., 2004. "Currency competition in a fundamental model of money," Journal of International Economics, Elsevier, pages 521-544.
    15. Aysen Arac & Funda Telatar & Erdinc Telatar, 2012. "Investigating the Time Varying Nature of the Link between Inflation and Currency Substitution in the Turkish Economy," Hacettepe University Department of Economics Working Papers 20122, Hacettepe University, Department of Economics.
    16. Philipp J. H. Schroeder, 2001. "Reconsidering Money: Monetary Exchange with Additive Transaction Costs," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(2), pages 301-301, June.
    17. Evrensel, Ayse Y. & Kim, Jong Sung, 2006. "Macroeconomic policies and participation in IMF programs," Economic Systems, Elsevier, vol. 30(3), pages 264-281, October.
    18. Zhang, Cathy, 2014. "An information-based theory of international currency," Journal of International Economics, Elsevier, pages 286-301.
    19. Pere Gomis-Porqueras & Carlos Serrano & Alejandro Somuano, 2005. "Dollar-denominated accounts in Latin America during the 1990s," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 29(2), pages 259-270, June.
    20. Airaudo, Marco, 2014. "Currency substitution, risk premia and the Taylor principle," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 202-217.
    21. Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, pages 113-136.

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