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Substituting a Substitute Currency – The Case of Estonia

  • Kari Heimonen

    (University of Jyväskylä)

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    This study evaluates substitution of foreign currency balances in Estonia, a transition economy neighbouring countries participating in EMU. The focus is on substitution between dollar and euro balances in the three basic functions of money – unit of account, store of value and means of payment. While traditional models for currency substitution concentrate on substitution between a domestic currency and aggregate foreign currency balances, we look for substitution between the dollar and the euro or euro-related foreign currency balances. We find substitution between dollarization and euroization to be asymmetric in the short run, which suggests that inertia, irreversibility and ratchet effects favour the euro. No significant evidence of asymmetries in the long run was detected. In general, the traditional model for currency substitution explains the dynamics of the euro and dollar as substitute foreign currencies.

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    File URL: http://128.118.178.162/eps/if/papers/0209/0209003.pdf
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    Paper provided by EconWPA in its series International Finance with number 0209003.

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    Length: 71 pages
    Date of creation: 19 Sep 2002
    Date of revision:
    Handle: RePEc:wpa:wuwpif:0209003
    Note: Type of Document - pdf; prepared on PC; pages: 71
    Contact details of provider: Web page: http://128.118.178.162

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    1. Bufman, G. & Leiderman, L., 1992. "Simulating an Optimizing Model of Currency Substitution," Papers 6-92, Tel Aviv - the Sackler Institute of Economic Studies.
    2. DeJong, David N. & Nankervis, John C. & Savin, N. E. & Whiteman, Charles H., 1992. "The power problems of unit root test in time series with autoregressive errors," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 323-343.
    3. Black, Stanley W., 1991. "Transactions costs and vehicle currencies," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 512-526, December.
    4. Bruneau, Catherine & Jondeau, Eric, 1999. " Long-Run Causality, with an Application to International Links between Long-Term Interest Rates," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 545-68, November.
    5. William H. Branson & Dale W. Henderson, 1984. "The Specification and Influence of Asset Markets," NBER Working Papers 1283, National Bureau of Economic Research, Inc.
    6. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
    7. Bergstrand, Jeffrey H. & Bundt, Thomas P., 1990. "Currency substitution and monetary autonomy: the foreign demand for US demand deposits," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 325-334, September.
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