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

Abstract

This study evaluates the magnitude of the permanent and the transitory components of_x000D_ currency substitution in the UK. The results indicate that the permanent component, the_x000D_ ratchet effect, accounted only for a small share while the aggregate temporary component,_x000D_ speculation, whose impact lasts about one month, was responsible for most of the dynamics_x000D_ of UK currency substitution. The findings thus lend support to the view that at worst_x000D_ currency substitution would only cause short-run problems for the UK economy.