Attachment to a National Money: Evidence on Currency Holding at Different Levels of Development

Abstract

AbstractMost governments issue and maintain a national money stock. Their reasons for doing so include national identity, deficit finance, and policy independence. Against this background, the authors examine agents’ attachment to national currencies as revealed in the pattern of currency holding across countries and over time. The econometric evidence suggests that economic theory can enhance our understanding of these patterns. In a sample of more than 130 countries from 1960 to 1998, the most defensible reduced‐form estimates impute some explanatory power to the various stages of financial development. Along with expected inflation and worldwide financial innovation, this factor provides a partial explanation of currency use around the world. Much variation in currency use across countries over time remains unexplained, however. This suggests that economists’ understanding of the attachment to national currencies is far from complete.