International Finance Discussion Papers

In measuring the percentage of foreign-held U.S., German, and Swiss currencies for the period of the 1960s through the 1990s, I obtain estimates much different from those of others. Using currency demand equations implied by cointegrating vectors for Canada, the Netherlands, and Austria, I estimate that in 1996 only 30% of U.S. currency was held outside the United States, and as much as 69% of German currency was held outside Germany. The U.S. estimate falls slowly over the 1960s, reaching a low of 5% in the first half of the 1970s, then rises through the early 1980s and again during the 1990s. Given that foreign holdings of the U.S., German, and Swiss currencies constitute the bulk of international currency substitution in the world, I find that, adjusted for inflation, currency substitution roughly tripled from 1986 to 1996.