What is the replacement currency’
The replacement of the currency use of foreign currency in transactions in the national currency. Thus, foreign currency acts as a medium of exchange. For example, the replacement of the currency occurs when the country has its own currency, so it “accepts” or takes a currency of another country to use. Or in the country can have its own Currency, but still prefer to use the currency of another country. A country that uses the currency substitution typically does not have its own Central Bank or currency with the official support of the financial scale. As an example, currency substitution, Panama uses the U.S. dollar as its too own form of currency.
Breaking down the ‘change currency’
Can countries use flexible exchange rates instead of fixed exchange rates in order to mitigate the effects of fluctuations in foreign currency on the domestic currency and economy. The increase in the rate of currency substitution means that the Domestic economy can become the victim of rapid changes in exchange rates, and, therefore, may experience increased monetary shocks from both home and abroad.
Limitations of currency substitution
There are both advantages and disadvantages, which can be done in the countries using the currency return. The advantage of using the substitution of currencies is that the less established or smaller countries can use a currency that has more stable values and are recognized on a more global scale.
The disadvantage is that when the country takes on a different currency, it also gives control of the currency in the country that actually “owns” the currency. Countries using the change of currency no control over policy affecting the currency and cannot print money from its Central Bank, if necessary.
Countries using flexible exchange rates can experience problems if there is a high rate of currency substitution because they can no longer control all currency through monetary policy. The higher the currency substitution, the greater the probability of currency disturbances caused by changes in foreign currency.
There are also considerations about how the replacement of the currency will affect the country depending on various factors within the country, such as how large the country is which Bank it is, and what role the country plays in international trade.