International Journal of Business and Economics Volume 5, No. 1 April​, 2006

The Dynamics of Currency Substitution: Evidence from UK Foreign Currency Balances

Kari Heimonen

School of Business and Economics, University of Jyväskylä, Finland

Abstract

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.

Keywords：currency substitution, speculation, decomposition.

JEL Classifications：E42, F36, F41.

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