The hysteresis of currency substitution: Currency risk vs. network externalities

Neven T. Valev

Journal of International Money and Finance, 2010, vol. 29, issue 2, 224-235

Abstract: It is widely documented that currency substitution (using foreign money in transactions) increases in periods of high inflation but does not decline once inflation is reduced. The paper uses survey data from Bulgaria, which experienced this phenomenon, to investigate the origins of this ratchet effect. We find that expected devaluation of the domestic currency, while relatively high, does not play a major role in sustaining the dollarization of transactions. Conversely, preferences for the use of foreign money are strongly influenced by people's perception that foreign money is already widely used in the economy.

Keywords: Currency; substitution; Dollarization; Hysteresis (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:29:y:2010:i:2:p:224-235

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