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Currency Substitution in Anticipation of EU Accession

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Countries in Eastern and Central Europe that are likely to join the European Union will eventually also join the European Monetary Union. The process of accession will entail a transition period at the end of which it is certain that the domestic currency will be replaced by the Euro. This paper argues that this programmed demise of the domestic currency may bring about significant spontaneous euroization already during the transition period. If the euro is adopted by the private sector in anticipation of the official changeover, the country incurs a resource cost in the form of lost seignorage. Compared to the initial members of the EMU that could print Euros equal to the outstanding monetary base, a country where euroization takes place before the entry into the EMU will use real resources to obtain the Euros. The paper proposes ways to deal with this difference in treatment.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 08-2002.

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Length: 16
Date of creation: May 2002
Handle: RePEc:gii:giihei:heiwp08-2002
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