Simulating an Optimizing Model of Currency Substitution

Abstract

This paper reports simulations based on the parameter estimates of an intertemporal model of currency substitution under nonexpected utility obtained by Bufman and Leiderman (1991). Here we first study the quantitative impact of changes in the degree of dollarization and in the elasticity of currency substitution on government seigniorage. Then, we examine whether the model can account for the comovement of consumption growth and assets' returns after the 1985 stabilization program, and in particular for the consumption boom of 1986-87. The results are generally encouraging for future applications of optimizing models of currency substitution to policy and practical issues.