CURRENCY SUBSTITUTION: EVIDENCE FROM INDONESIA

Abstract

Currency substitution occurs as domestic money (both currency and deposits) is replaced by foreign money in the portfolio of local residents. It can directly reduce the demand for domestic currency, or does so indirectly by increasing the velocity of domestic money’s circulation. This study aims to investigate currency substitution in Indonesia. Estimates of the cointegrating relations are obtained using Johansen’s multivariate procedure for the period January 2001 to May 2009. The empirical result shows that there is no currency substitution in fact happened in Rupiahs.

Keywords: Currency Substitution, Cointegration, Money Demand