Currency Substitution in Eastern Europe

Contains fulltext : 139540.pdf (publisher's version ) (Closed access)Economic and political uncertainty, high inflation and liberalization of foreign exchange restrictions have encouraged substantial currency substitution in the economies in transition. This paper presents empirical evidence on currency substitution in four Eastern European countries in transition: Poland, Hungary, Romania and Bulgaria. It is shown how currency substitution affects money demand and by that seignorage revenues. The empirical estimates of the money demand functions are used to calculate the seignorage maximizing rate of inflation in the economies in transition.19 p