Variation in the real exchange rate as a source of currency substitution

Substituting a Substitute Currency: The Case of Estonia

“…Rather, transaction demand for foreign currency balances emerge because of foreign trade. Ratti and Jeong (1994), 24 deVries (1988), Bergstrand and Bundt (1990), Pentecost (1996), (2000) 25 all note that foreign currency demand is closely related to transaction needs emerging from foreign trade. In those studies foreign trade and transaction demand turn out to be even more important than the opportunity costs for holding money.…”

“…In 23 See Bordo and Choudri (1982), Marquez (1987). For substitute foreign currencies, the Bourdo-Chourdi specification would be Ratti and Jeong (1994) model is an intertemporal, shopping cost version of a money service model and avoids the assumption of sequential portfolio selection applied in studies using the Miles (1978) model. Transformed Ratti and Jeong (1994)…”

“…This index is expected to capture the overall economic activity in Estonian economy on a monthly basis and serves as a measure for the transaction demand for foreign currency balances. Second, following Ratti and Jeong (1994), deVries (1988), As far as liabilities are concerned, the Estonian economy is regarded as euroized.…”

“…The last task relates the use of the international currency as a vehicle currency, an invoicing currency and a banking currency. 7 For evidence on the impacts of foreign trade on demand for the substitute currency, see Ratti and Jeong (1994), Milner, Mizen and Pentecost (1996 and deVries (1988). 8 The share of value in Estonia's 1997 exports to the EU area was 48 %.…”

Choice of the Substitution Currency in Russia: How to Explain the Dollar’s Dominance?

“…The first explanation of possible choice between currencies which we should test comes from international trade relations between countries which should be followed by transaction demand for foreign currency balances (Milner, Mizen and Pentecost, 2000, de Vries, 1988, Ratti and Jeong, 1994. The foreign currency demand inside countries should be related to Agents' behaviour addressing a demand of foreign currencies is often examined through the estimation of the opportunity costs of holding domestic money.…”