Discussion Paper

No. 2008-2 | January 21, 2008
The Demand for Currency Substitution


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.

JEL Classification:

E31, E41, E42



Cite As

John J. Seater (2008). The Demand for Currency Substitution. Economics Discussion Papers, No 2008-2, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-2

Comments and Questions

Anonymous - Referee Report
February 27, 2008 - 08:37

see attached file

Anonymous - Referee Report
April 14, 2008 - 08:35

see attached file

John Seater - Reply to the referees
April 17, 2008 - 16:08

See the attached pdf file.