the determinants of currency substitution by the macro approach in Iran: Application of Auto Regressive with Distributed Lags(ARDL)

If domestic currency of a country can’t to perform its functions, foreign currency substitute domestic currency and This phenomenon is called currency substitution. Currency substitution is a common phenomenon in developing countries that it has different effects on the economy of the countries, so it is important to identify the determinants of currency substitution.In this study, is used the method of Kamin and Erickson (2003) to estimate the amount of foreign currency in circulation. Then using a macro approach the determinants of currency substitution investigate in Iran. To estimate the real money demand function of Iran used the method of Johansen-Joselius cointegration and then to investigate the determinants of currency substitution used ARDL method. The Period of variables in this study are from 1338-1392. The results showed that currency substitution in Iran impressed by difference between domestic and foreign interest rates, domestic inflation rate and informal exchange rate, while the real volume of imports, worldwide inflation rate and gross domestic production on the currency substitution are effectless and insignificant. The results show that currency substitution is a function of the parameters of the opportunity cost of money. In other words the main purpose of the substitution is the release of opportunity costs of holding money.