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Theory and Relevance of Currency Substitution with Case Studies for Canada and the Netherlands Antilles

Casper G. de Vries
The Review of Economics and Statistics
Vol. 70, No. 3 (Aug., 1988), pp. 512-515
Published by: The MIT Press
DOI: 10.2307/1926791
Stable URL: http://www.jstor.org/stable/1926791
Page Count: 4
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Theory and Relevance of Currency Substitution with Case Studies for Canada and the Netherlands Antilles
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Abstract

This paper develops the theory of currency substitution from a choice theoretic point of view. The main result offers a simple relationship between the relative amount of currencies held and their opportunity costs, i.e., interest and capital gains. Our hypothesis is tested by case studies for Canada and the Netherlands Antilles. In contradistinction with other studies, we conclude that the elasticity of currency substitution is very small and negative. It is shown how the omission of the interest term in other studies biases the elasticity of currency substitution considerably.

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