Currency Substitution

Alberto Giovannini and Bart Turtelboom

No 759, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper reviews the extensive theoretical and empirical literature on currency substitution. After discussing the ambiguity surrounding the definition of currency substitution, the paper illustrates the causes of substitutability of different currencies using a cash-in-advance model and a model where money yields liquidity services. The effects of currency substitutability on exchange rates, international adjustment and the inflation tax are discussed. The paper also reviews the empirical facts on the size of currency substitution in developed and developing countries. Whereas currency substitution is found to be sizeable in some developing countries and on the rise in the European Community, estimates of the ability to substitute foreign for domestic currency are often found to be unreliable due to data, methodological and conceptual problems. Policy implications of currency substitution for international monetary cooperation and inflationary finance are explored.

Keywords: Currency Substitution; Dollarization; Foreign Currency Deposits; Liquidity; Money Demand (search for similar items in EconPapers)
JEL-codes: E41 E52 F36 F41 (search for similar items in EconPapers)
Date: 1993-04
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Citations: View citations in EconPapers (2)

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