NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Bart Turtelboom

The Brookings Institution

E-Mail: bturtelboom@brook.bitnet
Institutional Affiliation: The Brookings Institution

NBER Working Papers and Publications

December 1992Currency Substitution
with Alberto Giovannini: w4232
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 sizable 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 unrel...
 
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