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Exchange Rate Overshooting, Currency Substitution and Monetary Policy

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  • Zervoyianni, Athina

Abstract

In this paper, the authors introduce the possibility of currency substitution in an extended version of the sticky-price model of exchange-rate behavior, and examine its implications for the behavior of a small, open economy following an (unanticipated) contraction in the domestic money supply. It is shown that currency substitution is, in general, associated with two effects: the "expectations" effect and the "income" effect. The former is "stabilizing" in the sense that it reduces both the possibility that overshooting of the exchange rate takes place at all, as well as the extent to which it occurs if it does occur; the latter effect, however, can be destabilizing. Copyright 1988 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Zervoyianni, Athina, 1988. "Exchange Rate Overshooting, Currency Substitution and Monetary Policy," The Manchester School of Economic & Social Studies, University of Manchester, vol. 56(3), pages 247-267, September.
    • Handle: RePEc:bla:manch2:v:56:y:1988:i:3:p:247-67
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    Cited by:

    1. Yinusa D. O. & A. E. Akinlo, 2008. "Exchange Rate Volatility and the Extent of Currency Substitution in Nigeria," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 43(2), pages 161-181, December.
    2. Chris Milner & Paul Mizen & Eric Pentecost, 1996. "The impact of infra-European trade on sterling currency substitution," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 132(1), pages 160-171, March.
    3. Yinusa, D. Olalekan, 2008. "Exchange Rate Volatility, Currency Substitution and Monetary Policy in Nigeria," MPRA Paper 16255, University Library of Munich, Germany.
    4. Sharma, Subhash C. & Kandil, Magda & Chaisrisawatsuk, Santi, 2005. "Currency substitution in Asian countries," Journal of Asian Economics, Elsevier, vol. 16(3), pages 489-532, June.

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