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Currency substitution is the use of a foreign currency in parallel to or instead of a domestic currency. [1] Currency substitution can be full or partial. Full currency substitution can occur after a major economic crisis, such as in Ecuador, El Salvador, and Zimbabwe.
- What Is Currency substitution?
- Understanding Currency Substitution
- Types of Currency Substitution
- Risks of Currency Substitutions
Currency substitution is when a country uses a foreign currencyin lieu of, or in addition to, its domestic currency, primarily due to the greater stability of that foreign currency.
When a country engages in currency substitution, it will use foreign currency in place of its domestic currency for transactions. The foreign currency thus serves as the de facto medium of exchange and the de juremedium of exchange if the foreign currency is also recognized by the local government as legal tender Currency substitution frequently ha...
A nation may choose to engage in full or partial currency substitution. Some countries may choose to replace their native money with the foreign funds entirely. In other cases, a nation might circulate common cash, but decide to use another country’s currency in specific instances such as for international trade.
Some governments will place limits on the extent of foreign funds held by its citizens in an attempt to force them to use the domestic currency. Currency substitution also means that the domestic country will give up some economic control to the nation that issues the substituted currency, and this means that currency substitution by citizens threa...
Feb 1, 1998 · In this environment, it may be optimal for countries to have different currencies; we also identify conditions where separate national currencies do not expand the set of optimal allocations. Implications for a currency union in Europe are discussed.
- Narayana Rao Kocherlakota, Thomas Krueger
- 1998
Currency substitution occurs when an economy uses an alternative currency to the domestic currency. The alternative currency maybe used in parallel to the domestic currency or some cases may completely replace it.
May 14, 2021 · Thus, a country may not use its currency in another country unless it is converted to the local currency at an exchange rate. However, two or more countries can use one currency. For instance, Nineteen EU member states use a common currency known as the euro (€).
CountryCurrencySub CurrencyAfghanistanafghani100 pulsAlgeriadinar100 centimesAndorraeuro100 centsArgentinapeso100 centavos- John Misachi
Jul 21, 2019 · A country cannot simply print its own currency and use it to purchase goods and services in other countries for a few key reasons: Lack of international acceptance: For a country's currency to be usable abroad, it needs to be widely accepted and trusted by other nations and market participants.
Sep 16, 2017 · Yes, they can. There are many countries that do not have their own national currency, as described for instance in this article. There are basically two ways of adopting a non-national currency. The Euro is used in a number of countries that together decide on currency policy, so individual countries have not given up total control over it.
