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| Volume 5, No. 1,
April 2006 |
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The Dynamics of Currency
Substitution: Evidence from UK Foreign Currency Balances |
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Kari Heimonen |
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School of Business and Economics, University of Jyväskylä, Finland |
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| Abstract |
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This study evaluates the
magnitude of the permanent and the transitory components of currency
substitution in the UK. The results indicate that the permanent
component, the ratchet effect, accounted only for a small share
while the aggregate temporary component, speculation, whose impact
lasts about one month, was responsible for most of the dynamics of
UK currency substitution. The findings thus lend support to the view
that at worst currency substitution would only cause short-run
problems for the UK economy. |
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Key words:
currency
substitution; speculation; decomposition |
| JEL
classification:
E42; F36;
F41 |
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