Abstract
Empirical evidence of the existence of currency substitution in Barbados between 1973 and 1986 is provided. Within an environment of trade restriction, foreign exchange control, and a black market for foreign exchange, the demand for money is estimated using the black-market premium as one of the independent variables. This variable as a proxy measures the opportunity cost of holding domestic money vis-à-vis foreign money, and its statistical significance indicates the existence of currency substitution in the demand for only M1, which could render stabilization policies ineffective.
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