The Demand for Currency Substitution

32 Pages Posted: 18 Dec 2010

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: 2008

Abstract

A transactions model of the demand for multiple media of exchange is developed. Some results are expected, and others 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. 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. Independent empirical work provides support for the theory. --

Keywords: Currency substitution, dollarization

JEL Classification: E41, E42, E31

Suggested Citation

Seater, John J., The Demand for Currency Substitution (2008). Economics: The Open-Access, Open-Assessment E-Journal, Vol. 2, 2008-35, Available at SSRN: https://ssrn.com/abstract=1726831 or http://dx.doi.org/10.5018/economics-ejournal.ja.2008-35

John J. Seater (Contact Author)

Economics Dept., Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
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