Currency Substitution and Currency Controls: The Polish Experience of 1990

摘要

The paper considers the social welfare consequences of currency substitution anddetermines under which circumstances it is efficient from a social welfare perspective to prohibit currency substitution in a small open economy by means of imposing currency controls and under which circumstances it is inefficient to impose such controls. An empirical application of the analytical results is considered with respect to currency subtitution in Poland. In January 1990, Polish authorities decided to remove the strict foreign exchange controls. A strong increase in currency substitution took place. The removal of foreign exchange controls was a crucial element in the reform program that aimed at transforming Poland from a communist into a democratic market-oriented society. the removal of foreign exchange controls was also part of an extensive disinflation program that was launched in January 1990 that aimed at stopping the rampant hyperinflation that developed in the second half of 1989, as a consequence of the removal of former price ceilings in a shortage economy with