Abstract: This paper examines the use of U.S. cash dollars as a secondary currency in informal transactions worldwide. While there is considerable interest in and a large theoretical literature on the use of secondary currencies, few empirical results have been established. The primary reason is that the amount of hard foreign cash in circulation in an economy is generally unknown. We provide a window into this underground world of cash transactions with the first systematic evidence on the demand for physical cash dollars across countries. We use an extraordinarily detailed new data set with every wholesale shipment of physical cash dollars between 100 countries and the United States from 1990 to 2007. We define an extensive and intensive margin of currency substitution and examine the effects on each of a history of macroeconomic instability, competition with other currencies (the euro), and trade flows, along with the usual suspects such as country size, recent macroeconomic performance, and transaction costs. The highest inflation rate recorded over the previous thirty years significantly affects the demand for cash dollars, even after controlling for more recent movements in consumer price indexes. The intensive margin of dollar currency substitution has a positive relationship to the size of a country's trade flows and of its informal sector. Finally, we find a pattern of elasticities consistent with substitution from the dollar to the euro as a secondary currency in countries with significant trade with the euro area.
Publication Year: 2011
Publication Date: 2011-01-01
Language: en
Type: article
Indexed In: ['crossref']
Access and Citation
Cited By Count: 9
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot