Currency substitution in Romania

Abstract

The aim of this paper is to investigate the currency substitution phenomenon in Romania. We present the evolution of the DI (Dollarization Index) as it is defined by the IMF, the situation on the liabilities side and that of the banking sector. We assess the way in which the traditional functions of money have been affected by currency substitution. In the final part of this paper a demand for money function is estimated for Romania for a period between 1997:06—2003:03. This demand for money clearly demonstrates the existence of currency substitution between the domestic and foreign currencies. Also we test the stability of the model and conclude that despite a turbulent economic medium the demand for money function is stable.currency substitution, money demand, cointegration, error-correction model, Romania