Journal Article

No. 2008-35 | November 10, 2008
The Demand for Currency Substitution PDF Icon

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.

JEL Classification

E31 E41 E42

Citation

John J. Seater (2008). The Demand for Currency Substitution. Economics: The Open-Access, Open-Assessment E-Journal, 2 (2008-35): 1—30. http://dx.doi.org/10.5018/economics-ejournal.ja.2008-35

Assessment

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