Currency Substitution

AAA

DEFINITION of 'Currency Substitution'

The use of a foreign currency in transactions in place of the domestic currency. The foreign currency thus serves as a medium of exchange. Countries using flexible exchange rates can experience problems if there is a high rate of currency substitution because they can no longer control all currency types through monetary policy. The higher the rate of currency substitution, the greater the likelihood of monetary disturbances caused by changes in the foreign currency.

INVESTOPEDIA EXPLAINS 'Currency Substitution'

A country may choose to use flexible exchange rates rather than fixed exchange rates in order to mitigate the effect of foreign currency fluctuations on the domestic currency and economy. An increase in the rate of currency substitution means that the domestic economy can fall victim to rapid changes in exchange rates, and thus may experience monetary increased shocks from both home and abroad.

RELATED TERMS
  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Dollarization

    A situation where the citizens of a country officially or unofficially ...
  3. Foreign Currency Swap

    An agreement to make a currency exchange between two foreign ...
  4. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  5. Pegging

    1. A method of stabilizing a country's currency by fixing its ...
  6. Linked Exchange Rate System

    A system of managing a nation's currency and exchange rate by ...
Related Articles
  1. Forex Education

    Currency Exchange: Floating Rate Vs. ...

  2. Personal Finance

    How The U.S. Government Formulates Monetary ...

  3. Forex Education

    Dual And Multiple Exchange Rates 101

  4. Personal Finance

    What Are Central Banks?

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center