“Co-circulation” Involves the regular use of two or more currencies within a country. This paper covers measurement and policy issues associated with the physical movement of currencies between countries and use of multiple currencies within a single economy. Co-circulation is common in Latin America and Eastern and Central Europe, and it also occurs in several Middle Eastern, East Asian, and African countries. Co-circulation causes statistical measurement problems in the balance of payments and money stock estimates.
The paper reviews a number of methods used to measure co-circulation, Some current research indicates that US$200 billion or more may be in use outside the United States, and large amounts of other currencies may also be involved. In general, better techniques are available to measure currencies that leave their country of issue than to estimate the amount of foreign currencies circulating within an economy.
The penultimate section of the paper reviews some implications of co-circulation for statistical measurement and economic policy. Co-circulation is found to result in a loss of seigniorage to the host country, affect monetary policy control, and create foreign currency exposures within a country. Moreover, statistical errors may be created that could affect policy decisions.
An appendix discusses changes in demand for foreign currency that may occur when a country permits free circulation of foreign currency. A second appendix, contributed by Roman Zytek, discusses how market segmentation might affect statistical estimates of co-circulation.