TY - JOUR T1 - The Currency Substitution Phenomenon: Is the Nigerian Economy Immune? AU - Effiom, Lionel AU - Samuel, Ubi Peter JO - Journal of Economics Theory VL - 4 IS - 1 SP - 9 EP - 13 PY - 2010 DA - 2001/08/19 SN - 1994-8212 DO - jeth.2010.9.13 UR - https://makhillpublications.co/view-article.php?doi=jeth.2010.9.13 KW - Seignoriage KW -currency substitution KW -stationarity KW -reintermediation KW -dollarization KW -Nigeria AB - This study empirically examines the vulnerability or immunity of the Nigerian economy to Currency Substitution (CS), a phenomenon characterized by the preference and use of foreign currency ( in this case the dollar) by domestic agents side by side the local currency for economic transactions, particularly as a store of value. Using a Vector Error Correction Mechanism (VECM) for empirical explorations with exchange rate and US treasury bills rates variables as proxies for CS, it is shown that with persistent inflation and depreciation of the naira occasioned by exchange rate instability and monetary policy inconsistency. CS has been a dominant yet silent feature of the Nigerian economy with far reaching macroeconomic implications. The fundamental problem is that domestic agents perceive loss of purchasing power from holding the home currency be it from inflation risk, exchange rate risk or political instability. Consequently, there is a loss of seignoriage revenue to Nigerian government since its citizens prefer to hold foreign currency to naira, thus creating revenue in the process to foreign monetary authorities. Second, since firms, multinational companies and the elite class transact business with a preferred foreign currency, the phenomenon obscures financial transactions, reduces the cost of enterprise theft and facilitates corruption and rent seeking. This weakens the government’s ability to command real resources from the private sector and deepens fiscal deficits. It advocates that monetary authorities should pursue inflation and exchange targeting, among other measures, to lesson volatility pressures on the economy. ER -