Implications of currency substitution in a Walrasian model with a flexible exchange rate

Date

1996

Author

Breece, James H.

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This study investigates the ramifications of the introduction of currency substitution in a Walrasian model with a flexible exchange rate. It is shown that a proportionate change in the domestic money stock held at home will cause less than proportionate changes in the exchange rate and the balance of trade, and have an ambiguous effect on foreign inflation and hence on the terms of trade. Furthermore, under certain conditions, it is possible to observe a balance of trade deficit along with a terms of trade improvement. These results are qualitatively similar to the results produced in the fixed exchange rate regime with currency substitution but differ quantitatively. The quantitative differences may be positive or negative depending on the composition of each country's monetary wealth

URI

https://hdl.handle.net/11511/109495

Collections

Department of Economics, Article