ABSTRACT
This chapter discusses the some key macroeconomic variables, contending perspectives, and the empirical evidence in favour of and against currency substitution. It focuses on circumstances under which countries can substitute their currencies for convertible ones; this substitution is generally considered to be dollarisation. Currency boards are soft forms of currency substitution. Short of dollarisation, currency boards are fixed exchange rate monetary arrangements with strict rules. In a currency board (CB), the institution in charge of monetary policy guarantees with no restriction the conversion of the domestic currency against a chosen reserve currency at a fixed rate. Hong Kong has been able to sustain its CB because of dynamic management and institutional resistance to external shocks. The country experienced a banking crisis in 1980, for which the central banks had to bail out financial institutions. The CB, he argues, should be abandoned during economic upturns when capital is flowing in and after the fundamental objectives have been met.
