Currency substitution: a numerical dynamic programming approach
Author
Volkan, Engin
Advisor
Başçı, Erdem
Date
1998Publisher
Bilkent University
Language
English
Type
ThesisItem Usage Stats
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Abstract
This thesis conducts a theoretical study on currency substitution in an infinitelylived
small open financially repressed economy which is subject to stochastic
inflation shocks. For this purpose, a dynamic programming model is
constructed under the assumption that purchasing power parity holds. The
solution of the model through value function iteration shows that under high
inflation, and financial repression, the inhibitants of an economy will demand
foreign currency to the extend that it provides a better protection of their wealth
against inflation.
Keywords
Currency substitutionBellman’s equation
Value function iteration
Cash-in-advance
Transaction costs