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Currency Substitution in Developing Countries: An Introduction

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  • Calvo, Guillermo
  • Vegh, Carlos

Abstract

This paper reviews the main policy and analytical issues related to currency substitution in developing countries. The paper discusses, first, whether currency substitution should be encouraged or not; second, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs; third, the effects of changes in the rate of growth of the money supply on the real exchange rate; fourth, the interaction between inflationary finance and currency substitution; and, finally, issues related to the empirical verification of the currency substitution hypothesis.

Suggested Citation

  • Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20338
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    References listed on IDEAS

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    3. Pablo E. Guidotti & Carlos A. Rodriguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 518-544, September.
    4. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
    5. Dornbusch, Rudiger & Reynoso, Alejandro, 1989. "Financial Factors in Economic Development," American Economic Review, American Economic Association, vol. 79(2), pages 204-209, May.
    6. Calvo, Guillermo A, 1992. "Are High Interest Rates Effective for Stopping High Inflation? Some Skeptical Notes," World Bank Economic Review, World Bank Group, vol. 6(1), pages 55-69, January.
    7. Guillermo Calvo & Carlos A. Végh Gramont, 1990. "Money Supply and Interest Rate Policy in a New-Keynesian Framework," IMF Working Papers 90/119, International Monetary Fund.
    8. Mohamed El-Erian, 1988. "Currency Substitution in Egypt and the Yemen Arab Republic: A Comparative Quantitative Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 85-103, March.
    9. Jacob A. Frenkel, 1982. "United States Inflation and the Dollar," NBER Chapters,in: Inflation: Causes and Effects, pages 189-210 National Bureau of Economic Research, Inc.
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    12. Girton, Lance & Roper, Don E, 1981. "Theory and Implications of Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(1), pages 12-30, February.
    13. Bufman, G. & Leiderman, L., 1992. "Currency Substitution under Non-Expected Utility-Some Empirical Evidence," Papers 6-92, Tel Aviv.
    14. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
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    16. Engel, Charles, 1989. "The trade balance and real exchange rate under currency substitution," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 47-58, March.
    17. Calvo, Guillermo & Vegh, Carlos, 1991. "Exchange rate stabilization under imperfect credibility," MPRA Paper 20486, University Library of Munich, Germany.
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    More about this item

    Keywords

    Currency substitution; dollarization; monetary policy;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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