If a country's domestic currency fails to perform its functions, foreign currency substitution occurs. This phenomenon is common in developing countries and is influenced by various economic and political factors. The main objective of this research is to estimate the relationship between exchange rate overshooting and currency substitution in Iran. We first use the Kamin & Ericsson method (2003) to evaluate the amount of circulating foreign currency and currency substitution within the Iranian economy, using annual data from 1979 to 2020. Then, we apply the ARDL method to estimate the impact of exchange rate overshooting on currency substitution. The long-term results indicate that exchange rate overshooting consistently increases currency substitution in Iran. Conversely, gross domestic product negatively affects currency substitution, while war and sanctions moderate this effect. Furthermore, the impact of war is greater than that of sanctions. According to the error correction coefficient (-0.92), it takes about 13 months to reach long-term equilibrium. Understanding the relationship between currency substitution and overshooting helps policymakers design better strategies for managing exchange rates and monetary policy.

Using the currency substitution theory, this paper attempts to identify the determinants of currency substitution degree in Iran. The hypotheses of this paper are: 1-In Iranian economy the trend of currency substitution has been ascending. 2-There is a direct relationship between the degree of currency substitution and domestic inflation rate of the country (CPI). 3-The degree of currency substitution has an indirect relationship with the foreign exchange rate in the parallel market. 4- The degree of currency substitution in Iran has a direct relationship with GDP. The results reveal that the first and second hypotheses were verified and the third and fourth ones assumed not to be valid. Despite the reduction in the volume of dollar in some years, the trend of currency substitution has been increasing.

Introduction The devaluation of an economy and currency substitution(CS) are monetary dimensions, which are usually is faced by developing countries, including Iran. CS occurs when the domestic currency of a country cannot perform its functions and is substituted by a foreign money will. CS The has different effects on all economic factors, including households, firms, and the government, and has caused crises in developing countries in recent decades. This phenomenon weakens the national (domestic) currency of a country, either formally (with the will of the government) or informally (without the will of the government). Due to high inflation rates especially in recent years, this phenomenon is still increasing and, therefore, it is necessary to consider its effects on welfare. A major measure to evaluate the welfare of a society is private consumption. This study examines the effects of CS on welfare through its effects on private consumption. Theoretical frame work This study examines the welfare effects of currency substitution (CS) through the impact of the degree of CS on private consumption. Individuals convert currency into different assets under inflation conditions. There are several reasons why this conversion occurs. Some people attempt to take advantage of these assets, while others want to eliminate brid of the opportunity cost of holding money. Therefore, they are willing to put money in various courses, including bonds, stocks, foreign currency (especially dollars), long-term saving deposits, and real assets such as durable goods, estate, and tenement. In this study, since the goal is examining the welfare effects of CS, and CS is the replacement of domestic currency with foreign currency (dollar), then it is necessary to examine only the impact of this asset from among others. Generally, no information is available for determining the exact amount of dollars in circulation. An approximate method is the estimation of the amount of dollars in circulation using Kamin and Ericsson’ s (2003) method. Kamin and Erickson used a new method to estimate the amount of dollars in circulation. They added the maximum inflation rate(indicative devaluation of the domestic currency) to the function of money demand. Then the formula was used to estimate the amount of dollars in circulation, in which the coefficient of the maximum inflation rate is used. Afterwards, the degree of CS is obtained. Finally, the effect of CS on consumption is estimated. Methodology Before using time-series variables in the studies, it is necessary to determine whether they are stationary or non-stationary. If the time-series variables are not stationary, there may be a problem known as the false regression. In this study, the generalized Dickey-Fuller (ADF) test was employed to perform a single root test, and Schwartzbisin (SBC) statistics was utilized because the observation volume is less than 100. Here, variables are the co-integration of the first order, that is, they are stationary with the first-order difference. Consequently, to estimate the real liquidity demand for money in Kamin and Ericsson’ s method and estimate the effect of the degree of CS on private consumption, the Johansen-Juselius co-integration approach is used. Results and Discussion One of the normalized vectors of co integration in terms of significance is acceptable. Results showed that the coefficient of the degree of CS as an independent variable in the consumption function is significant and negative. In fact, CS affects private consumption and the welfare of individuals, that is, the degree of CS reduces private consumption and welfare. Conclusions and Suggestions The results demonstrated that CS influences consumption because CS is meaningful in the function of consumption and its sign is negative. In fact, increasing CS reduces private consumption and also decreases welfare. Due to the negative impact of CS on consumption, monetary and financial authorities are obligated to make decisions to manage and reduce the degree of this phenomenon. These decisions may include the following: Real interest rates are negative in Iran for most years. Therefore, controlling the rate of inflation is a way to prevent having a negative real interest rate. Risk and uncertainty are high in Iran's financial markets. The reduction of risk can help financial markets to become more attractive. Providing new financial instruments to attract liquidity to the economy like new Islamic financial papers is recommended. Establishing economic and curbing inflation to prevent the speculation on the real assets of durable goods is suggested. Preventing the extreme fluctuations of exchange rate is recommended.

One of the most important factors influencing the exchange rate volatility is currency substitution due to the dollarization of the economy. Currency substitution is a common phenomenon in developing countries. The purpose of this study is to investigate the asymmetric effect of currency substitution on exchange rate volatility in Iran. In this study, the quarterly data of Iran's economy during the period 1990-2021has been used by applying the Bound test method and autoregressive with distributive Lag and Markov switching methods. Based on the results, Model MSIH(2)-AR(2) was chosen as the optimal model. In addition, in measuring the amount of money, due to the important role of defining the amount of money from monetary aggregates, simple sum and Divisia are used. The results show that the Divisia monetary aggregate is more appropriate than the simple sum in the expression of asymmetries. Currency substitution in the low-volatility regime had a negative effect on exchange rate volatility, but in the high-volatility regime, the effect of currency substitution was significantly positive. It illustrates the asymmetry effect of currency substitution on exchange rate volatility in various exchange rate regimes and confirms the asymmetric effect of currency substitution on exchange rate volatility.

Currency substitution refers to a situation where a nation citizens prefer to hold foreign currency, instead of domestic currency, in their asset portfolio. There are many reasons for the occurrence of currency substitutions. The major reasons are: persistent national currency depreciation, the continuation of high inflation, economic instability, a negative real interest rate capital flight due to legal and illegal migrations, and rise in the goods smuggling activities. This phenomenon is seen in both developed and developing countries. In developed countries currency substitution occurs asymmetrically and bilaterally. However, in developing countries currency substitution exists unilaterally reducing the effects of monetary policies. This paper compares the degree of Iran's currency substitution with degree of currency substitution in other 26 countries. The findings show that among 27 countries under investigation scoring 83.5 percent of substitution Bolivia ranks top. Iran with 38.4 percent ranks 12th among 27 nations. And Angola with 6.3 percent ranks 27th in the degree of currency substitution. In order to prevent a expansion of this phenomenon following measure are proposed:1-inflation controlling policy should be give priority 2- more appropriate investment opportunities should be created to mobilize the surplus money (savings) to be invested in economy's profitable sectors instead of being converted into dollar and other foreign currencies 3- to a possible extent exchange rate volatilities should be minimized to reduce the incentives for substituting domestic currency with a foreign currency. 4- Certain measures should be adopted to help official interest rate in the banking system exceed the inflation rate.

The aim of this paper is surveying the effects of money growth uncertainty on currency substitution. For this, bivariate GARCH model and VAR-BEKK method was used on the base of data for 1979 to 2014. The results show that money growth uncertainty affects currency substitution positively. Also, currency substitution, affected by its own past shock and the currency growth. On the other hand, there have been spillover of fluctuations from the currency growth to currency substitution and vice versa. Due to the existence of currency growth effective relationship on the currency substitution in Iran, it is necessary for controlling currency growth and preventing from currency irregular growth by policy makers.

Using the Dollarization theory, this paper attempts to identify the determinants of currency substitution degree in Iran and Argentina. Despite the reduction in the volume of the dollar in some years, the trend of currency substitution has been increasing.This Paper examines Dollarization phenomenon in Iran and Argentina's economy through estimating the Volume of Dollars and Degree of Currency Substitution. The results imply that Dollarization in Iran and Argentina is one-way.  

This article attempts to univestigate the phenomon of currency substitution in Iranian economy, using the ARDL model. For this purpose both long-run and short-run demand functions were estimated using the statistical data for 1974-2009 period. According to our findings, currency substitution both in long-run and short-run were confirmed with long-run substitution having a more powerful effect than long-run substitution. Also, it is indicated that the direct effect of income and the indirect effects of real interest rate and inflation on demand for money in the long-run were greater than in those in the short-run. The ECM estimated from the real demand function for money was-0.24 which expresses a rather slow process of currency adjustment in Iran.

Introduction: One of the words that is heard in the present life is digital currency Digital currency is a component of a decentralized financial system to facilitate economic transactions through evicting intermediaries such as banks as much as possible. In the meantime cryptocurrency is a digital or virtual currency that is secured by cryptography and made nearly impossible to counterfeit or double-spend. In the early 1990s, some elite people intended to give more freedom to the people through the use of the Internet and reduce the power of governments. The main goal of these elites was to empower people to control money and information and to simply eliminate intermediaries such as banks. Methodology: Templates based on time series equations are a new type of economic modelling that dates back to the early 1970s. Time series patterns include a wide range of economic patterns, the most important of which is the vector auto regression pattern. Time series equations can be extracted in two ways, including a method of inference from theory and then modelling according to the researcher and the relevant statistical tests to determine the accuracy of the model and the estimated parameters. This type of modelling faces several problems such as unstructured parameters, structural shock detection, and specification error. Due to the nature of partial equilibrium, they sometimes have difficulty understanding the economic conditions and erroneous predictions. The problems are due to the difference between the model and the economic theory. To solve these problems, dynamic stochastic general equilibrium (abbreviated as DSGE, or DGE, or sometimes SDGE) models were used. This kind of modelling is a macroeconomic method often employed by monetary and fiscal authorities for policy analysis, explaining historical time-series data as well as future forecasting purposes. The present study has used the DSGE method to estimate the model. In this model, it is assumed that households gain utility from consumption, government currency and cryptocurrency, and labor supply has inutility for those households. Therefore, they try to maximize its utility by using their budget constraint. Another part of this study is the entrepreneurial section (cryptocurrency miners), which assumes that there is a continuous chain of entrepreneurs denoted by n, and that each entrepreneur operates under conditions of perfect competition. The third part is the manufacturing firm, which assumes that firms are different in an exclusive competitive environment for the production of intermediate goods and have access to other intermediate goods of other firms to produce a final product under perfectly competitive market conditions. The last section is the central bank, which determines the monetary policies governing the society. In this study, it is assumed that the central bank uses the nominal interest rate as a rule set in a modified Taylor (1993) model. Results and Discussion: This model is estimated using the monthly data of Iran, and the results show that there is a strong substitution effect between the government currency real balance and the cryptocurrency real balance in response to technology, preferences and monetary policy shocks. In addition, government currency demand shocks have a greater impact on the economy than the cryptocurrency demand. Cryptocurrency productivity shocks also lead to a decline in the nominal exchange rate. Production and inflation decrease when nominal interest rates increase. However, the effects of these shocks are much less than those of traditional shocks. Conclusion: Overall, this study provides new insights and evidence on the underlying mechanisms of cryptocurrency and its effects on the economy. It can be a guide for investors, policymakers, central bankers and researchers as how to operate cryptocurrencies and the corresponding ecosystem in the future. In particular, two policy recommendations emerge from the analysis of this study. First, according to the results, it was shown that increasing the supply of cryptocurrencies has a negative effect on production. Thus, monetary authorities may decide to adjust the rates in response to the changes in the cryptocurrency real balance, which include the weight for cryptocurrency growth, as a policy response. Second, if the central bank is to prevent a decline in output, the nominal interest rate response to the changes in government currency growth must be gradual. Furthermore, there is a strong alternating effect between the real money balance and the real money code balance in response to technology, preferences and monetary policy shocks. As the important finding of the study, the increase in production and inflation is greater when cryptocurrency is not present in exchanges, indicating that more inflation exists when there is no cryptocurrency.