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After the 2008 global financial crisis, the world has been through an improving economic integration. The scale of RMB cross-border transaction flows expands as well. Countries around China are gradually accepting the RMB as a means of trading and investing. Nowadays, the phenomenon of RMB substitutes the currencies of neighboring countries has become more and more widespread. As a frontier region for China's opening up to the outside world, Hong Kong's financial market is highly transparent with perfect infrastructures. The completion of the Hong Kong offshore RMB market leads to a rise of the RMB stock in Hong Kong, so there is a clear phenomenon of RMB substituting Hong Kong dollars (HKDs) in Hong Kong. This paper studies the substitution effect of RMB and HKD from both theoretical and empirical aspects, and puts forward policy recommendations based on the research results.

This paper aims to investigate the presence of currency substitution in eight African countries.

This study investigates the presence of currency substitution in eight African countries – Egypt, Morocco, Nigeria, Ghana, Kenya, South Africa, Tunisia and Zambia – for the period 1976 to 2005 using both regional and US dollar as anchor currencies.

The paper finds that currency substitution is prevalent in Ghana and Nigeria when CFA franc is used as an anchor currency. However, when US dollar is used as an anchor currency there is no evidence of currency substitution in Ghana, but the presence of currency substitution in Nigeria is still observed. The paper also finds the presence of currency substitution in South Africa, but not in Egypt when the US dollar is the anchor currency. For Kenya, Tunisia and Zambia there is no evidence of currency substitution irrespective of the anchor currencies considered. In the case of Morocco, no evidence of currency substitution is observed when the Egyptian pound is used as anchor currency, but there is weak evidence of currency substitution when the US dollar is considered.

This paper provides useful information on the presence of currency substitution in African countries.

The existence of a stable relation between the demand for real cash balances and some few variables relating it to real economic activity is one of the cornerstones of the monetarist approach. Such a relation permits us not only to analyze the impact of monetary change on economic activity but, since it is stable, it also has important predictive content. A better insight is then possible on the analysis of the effects of monetary policy. On this basis, it has been shown that money really matters and that the money supply is, with regard to economic stability, a powerful but also a dangerous weapon when heedlessly used by governments.

The demand for money is an important function of stabilization policies where such policies depend on the ability to manipulate the size of money supply in order to insulate real output from monetary disturbances. This paper investigates whether foreign money in Egypt should be included in transactions oriented measures of money supply. Variance decompositions analysis of demand functions for domestic money reveals that deviation of the expected rate of return on foreign money from that on domestic money is more influential than expected depreciation in accounting for quarterly forecast error variance in domestic real balances. This result suggests that portfolio rather than transactions considerations is the dominant factor behind holding foreign money in Egypt. The main policy implication contained in these results implies that foreign money should not be included in transactions oriented measures of money supply that are used as targets when implementing a monetary policy.

Propensity to dollarize in Latin America in the demand-side of some economies of the region has a strong political risk component which, in the past, was mainly carried out by inflationary pressures. Coping with risk meant holding FCDs. A recursive multilevel model is developed and empirically tested with Colombia’s data to stress a country-specific tendency to dollarize due to political risk. The chapter’s conclusions suggest that consideration of issues, policies and implications inherent to the decision to dollarize cannot ignore that, the solution to any government-enforced dilemma in the supply-side of these economies, is also politically motivated. Results of a survey are also provided.

The assignment of targets to instruments in developing countries cannot satisfactorily follow any simple universal rule. Which approach is appropriate is influenced by whether the economy is dominated by primary exports, by the importance of the domestic bond market and bank credit, by the extent of existing restriction in foreign exchange and financial markets, by the presence or absence of persistent high inflation, and by the existence or non‐existence of an active international market in the country's currency. Eighteen observations and maxims on stabilisation policy are tentatively drawn (pp. 64–8) from the material reviewed, and the maxims are partly summarised (pp. 69–71) in a schematic assignment, with variations, of targets to instruments.

The Haitian gourde is one of the most curious and exotic currencies of the world. On it is printed the striking statement: “The banknote, in conformity with the Constitution of the . Republic of Haiti, is payable to the bearer in legal money of the United States of America at the rate of five gourdes for one dollar.” Amazingly, the gourde stands exactly where it was set by the Convention of April 12, 1919 at five gourdes per dollar. This fixity in the exchange rate is a remarkable achievement of an otherwise totally squalid economy record, which has been made very much due to the total convertibility of gourdes into dollars and their easy co‐existence and use in Haiti. Such a feat runs counter to early suggestions in the newly developing currency substitution literature that currency competition promotes instability in rates. A very different story emerges due west on the largest English‐speaking island in the Caribbean, Jamaica, where monetary turbulence has been the rule since 1978. The currency there was initially backed 50 percent by pounds sterling when the Bank of Jamaica began operation in May 1961, but switched to a dollar peg in January 1973 at $1,10 US, a rate maintained through 1977. After the economic problems of 1976–77, the Jamaican dollar was devalued 15½ percent in January 1978 and, under the strong advice of the International Monetary Fund, a further 32 percent in May 1978. Following was a “crawling peg” devaluation of 1½ percent per month until October 1978, then 1 percent a month until May 1979, when the current dollar peg of 56.13 cents per Jamaican dollar was established. This dramatic decline in the currency was caused in part by expansionary monetary policies of the Bank of Jamaica monetizing budget deficits, and in part by the decline in tourism, the fall in bauxite and steel output, and the oil shocks Jamaica experienced. (From 1974 to 1979, the government budget deficit went from 168 million Jamaican dollars (J$) to 551 mill J$ with a peak of 625 million in 1978, holdings of government debt by the central bank from 72 to 898 mill J$, and net foreign assets or reserves of the central bank plunged from 141 to minus 778 mill J$ (Source: International Financial Statistics, IMF 1980 Yearbook and IFS January 1981 issue).) The International Monetary Fund set specific performance criteria such as devaluation and ceilings on government budget deficits for successive draws on a substantial loan of 351 million U.S. dollars or 360 percent of Jamaica's quota at the end of 1979.

Monetary unification within Europe appears to be on target. Eleven nations pegged their currency to the euro in 1999. The euro‐zone is experiencing varying levels of growth related to GDP. Balancing policy for 11 nations will be difficult. The true test will take place when asymmetric shocks hit one or several of the nations and unemployment rises to unmanageable levels forcing the European Union and European Central Bank to make tough decisions. Cultural issues and national identities are ever present. Optimum currency areas and comparative advantage discussed. The paper is divided into four major sections – reasons for unification, benefits, issues and conclusion.

The purpose of this paper is to study how the foreign currency account (FCA) is affected by the domestic fixed deposit (FD) rate, the FCA rate, the expected exchange rate and exchange rate risk.

This paper analyses the causal relationship between the domestic FD rate, the FCA rate, the expected exchange rate on a set of foreign currency deposits and exchange rate volatility, based on the theory of portfolio choice. Based on the theory, the panel vector autoregressive regression of fully modified ordinary least squares and dynamic ordinary least squares are modelled.

There is no cointegrating relationship for the three-month FCA deposits, the domestic FD rate, the FCA rate and the expected exchange rate. Only the six-month FCA business deposits are affected by the domestic FD rate, the FCA rate and the expected exchange rate. The FCA depositors are not affected by exchange rate volatility.

This study is conducted based on the FCA rate quoted by the leading commercial banks in Malaysia, Maybank. Thus, the FCA rate is used as a proxy for the FCA rate of commercial banks in Malaysia.

Individual depositors have to save in more than the three-month FCA to realise their expected return. For individuals, the FCA deposit is not an alternative choice to domestic FD. Exporters may use the FCA deposit to finance their foreign purchases to save the cost of foreign exchange conversion but it is still not an appropriate hedging tool against foreign exchange fluctuations as compared to the existing forward foreign exchange facility.

After reviewing the theoretical and empirical literature on currency substitution, a model is used in this chapter to empirically examine the state of dollarization in Middle East and North African countries, using Lebanon and Egypt as case studies. For Lebanon, despite the decline in inflationary expectations, the expectations of currency depreciation, and an increase in real interest rate differentials between domestic and foreign currencies, dollarization did not decline by the anticipated amount. For Egypt, unlike many Latin American Countries, currency substitution was successfully reversed for a period when the government managed to peg the value of the Egyptian pound to the dollar.