Following the collapse of Bretton-Woods and the advent of floating
exchange rates, economists noted the emergence of demand side
substitution of the world's currencies, a phenomenon that has
become known as dollarization and currency substitution. Currency
substitution presents a number of problems to the policy maker and
to the country experiencing the phenomenon. In this book, Michael
J. Welker offers a summary of several key considerations that
motivate this and other research on currency substitution. The
discussion assumes the traditional welfare concept in
macroeconomics that any reduction in the effectiveness of monetary
and fiscal policy impairs the efficiency of resource allocation and
the rate of economic growth. In theoretical work on currency
substution one line of thought suggests that real exchange rate
depreciation will result when a small open economy revalues under
currency substitution, while another line of thought poses that
real exchange rate appreciation will occur. Evidence from Mexico in
the last decade of the 20th Century is presented in this text to
contribute to the debate.
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