Editing Currency substitution (section)

==Types==
'''Unofficial currency substitution''' or '''de facto currency substitution''' is the most common type of currency substitution. Unofficial currency substitution occurs when residents of a country choose to hold a significant share of their financial assets in foreign currency, even though the foreign currency is not [[legal tender]] there.<ref>{{cite journal|last=Balino|author2=Berensztein|title=Monetary Policy in Dollarized Economies|journal=IMF Occasional Paper 171|year=1999}}</ref> They hold deposits in the foreign currency because of a bad track record of the local currency, or as a hedge against inflation of the domestic currency.

'''Official currency substitution''' or '''full currency substitution''' happens when a country adopts a foreign currency as its sole legal tender, and ceases to issue the domestic currency. Another effect of a country adopting a foreign currency as its own is that the country gives up all power to vary its [[exchange rate]]. There are a small number of countries adopting a foreign currency as [[legal tender]].

Full currency substitution has mostly occurred in Latin America, the Caribbean and the Pacific, as many countries in those regions see the [[United States Dollar]] as a stable currency compared to the national one.<ref>{{cite journal |last=Mundell |first=R. A. |year=1961 |title=A Theory of Optimum Currency Areas |journal=[[American Economic Review]] |volume=51 |issue=4 |pages=657–665 |jstor=1812792 }}</ref> For example, Panama underwent full currency substitution by adopting the US dollar as legal tender in 1904. This type of currency substitution is also known as '''de jure currency substitution'''.

Currency substitution can be used '''semiofficially''' (or officially, in bimonetary systems), where the foreign currency is [[legal tender]] alongside the domestic currency.<ref name="Bogetic 179–213">{{cite journal|last=Bogetic|title=Official Dollarization: Current Experiences and Issues|journal=Cato Journal|year=200|volume=20|issue=2|pages=179–213}}</ref>

In literature, there is a set of related definitions of currency substitution such as '''external liability currency substitution''', '''domestic liability currency substitution''', '''banking sector's liability currency substitution''' or '''deposit currency substitution''', and '''credit dollarization'''. External liability currency substitution measures total [[external debt]] (private and public) denominated in foreign currencies of the economy.<ref name="Bogetic 179–213"/><ref>{{cite journal |last1=Berkmen |first1=S. Pelin |first2=Eduardo |last2=Cavallo |title=Exchange Rate Policy and Liability currency substitution: What Do the Data Reveal about Causality? |journal=Review of International Economics |volume=18 |issue=5 |year=2010 |pages=781–795 |doi=10.1111/j.1467-9396.2010.00890.x |s2cid=154678349 |url=http://elibrary.imf.org/view/IMF001/02183-9781451865974/02183-9781451865974/02183-9781451865974.xml }}</ref> Deposit currency substitution can be measured as the share of foreign currency deposits in the total deposits of the banking system, and credit currency substitution can be measured as the share of dollar credit in the total credit of the banking system.<ref>{{cite book|last=Pinon|first=Marco|title=Macroeconomic Implications of Financial currency substitution The Case of Uruguay|year=2008|publisher=International Monetary Fund|location=Washington DC|pages=22}}</ref>