The Demand for Currency Substitution

40 Pages Posted: 7 Feb 2004

See all articles by John J. Seater

John J. Seater

Economics Dept., Boston College

Multiple version iconThere are 3 versions of this paper

Date Written: July 2006

Abstract

A transactions model of the demand for multiple media of exchange is developed and applied to the study of currency substitution. The analysis provides a theoretical foundation for results reported in the empirical literature. Some results are expected, such as the dependence of currency substitution on the rates of return on the various currencies. Other results are both new and surprising. There are both extensive and intensive margins to currency substitution, and inflation may affect the two margins differently, leading to subtle incentives to adopt or abandon a substitute currency. Also, variables not previously considered in the literature affect currency substitution in complex and somewhat unexpected ways. In particular, the level of income and the composition of consumption expenditures are important, and they interact with the other variables in the model. The theory gives guidance on what data needs to be collected to conduct tests of the derived implications.

Keywords: Currency substitution, Dollarization

JEL Classification: E41, E42, E31

Suggested Citation

Seater, John J., The Demand for Currency Substitution (July 2006). Available at SSRN: https://ssrn.com/abstract=495662 or http://dx.doi.org/10.2139/ssrn.495662

John J. Seater (Contact Author)

Economics Dept., Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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