The practice by the citizenry of a country to hold the currency of a foreign country in addition to its domestic currency as a store of value or as an additional medium of exchange. Historically, governments and citizens of developing countries have turned to foreign currencies, primarily the U.S Dollar, as a substitute for their declining currencies. This typically resulted in increased volatility of their currencies exchange rate making it difficult for their central banks to intervene with stabilizing monetary policies.
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We study currency substitution from first principles in order to study how government policies affect ... Otherwise, currency substitution and dollarization will arise.
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