| Currency substitution is a special monetary disturbance under open economy.Itmeans that one currency directly or indirectly replaces another one in terms ofmeasurement of value,method of payment,medium of exchange and storage of value.For one country,currency substitution is double-edged,representing the fact thatforeign currency substitutes domestic one and domestic currency substitutes foreignone.It is an unavoidable issue in the opening reforms of less developed countries andseriously affects macro economic stability and the efficiency of economic policies.Due to the changes in the fundamental financial environment,currency substitutionhas become a significant factor in Chinese economy.Hence,the thesis systematicallyanalyzes currency substitution mechanism,anti currency substitution and itsapplication in China.Based on money service theory,marginal utility theory,currency portfolio theory andprecautionary demand theory,the thesis firstly constitutes a theoretical model todemonstrate the forming mechanism of currency substitution.It states the relationshipbetween currency substitution and other main economic variables,such as foreignexchange,monetary policy,Laffer Curve,balance of payment,wealth structure andcredibility of policies etc.According to Inaction Band,due measures should be takento prevent currency substitution and adequate attention be paid to the coordination andcooperation as well.Furthermore,the thesis reviews the development of RMB as substitute currency andsubstituted currency and offers instructive principle and policies to guard againstcurrency substitution and promote RMB internationalization.As far as a substitutecurrency is concerned,it calculates the degree of RMB substitution and points out thecauses,including scale,interest rate difference,real exchange rate and institutionalfactor.It throws light on the influence of currency substitution on Chinese economyand the sensible measures to fight against the trend.On the other hand,from theperspective of a substituted currency,the thesis also indicates the meaning of RMB internationalization and implies its necessity and feasibility.Nowadays,RMB haswidely used around China,and the ever-widening tendency gives rise to RMBinternationalization.Admittedly,owing to the comparison of revenue and cost andinternationalization of other currencies,the 3-step prosperity approaches are laiddown as follows.The first step is to enhance circulation among surrounding countries,being a regionally dominant currency coming a close second and the internationalcurrency being the last.Accordingly,several advisable measures are stronglysuggested,involving the change of economic growth way,the perfection of financialsystem,the enhancement of trade and investment,building up of international financecenter and off-shore market,currency cooperation,strengthening supervision andfollowing the tendency of virtual economy.As RMB gains increasing internationalmarket share,the impression that China is a big country for trade but small forcurrency will be altered and the international currency arrangement will be changedon account of the prosperity of RMB.The innovation of the thesis lies in the following aspects.Firstly,it is the first time toinclude the relationship of currency substitution and credit and debt structure andpolicy reliability.Secondly,the thesis builds up an intertemporal optimization modelto explain currency substitution mechanism in developing countries.Further,thetraditional economic models are extended by the introduction of currency substitutionand more statistics methods and cross-country data are used to reflect the relationshipof currency substitution and other economic variables.Moreover,based on inactionband theory,it summarizes the measures for anti-currency substitution.Lastly,fromthe perspective of substituted and substitute currency,it reviews the history ofcurrency substitution of RMB and makes prospects about RMB internationalization.
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