:: 1, Issue 1 (Modern Theories of Economy,Volume 1, No.1,February, 2014 2013) ::
TFI 2013, 1(1): 149-168 Back to browse issues page
The Consequence of National Currency Redenomination: Would Dropping Zeroes From Domestic Currency Result in Inflation?
Mohammad Noferesti * , Zahra Norouzi
Abstract:   (1037 Views)
It is due to considerable devaluation  of  Rial in recent years that special attention is given to the redenomination of national currency. Although the devaluation is to such an extent that redenomination is unavoidable, yet mainly due to apprehension about the possible incidence of inflation, there is a hesitation and procrastination about it.
This article examines the currency redenomination policy from the view point of  its possible inflationary impact. In doing so, the focus is placed on the money supply, after such a policy is implemented. If  redenomination  together with issuing larger denominated bank notes increase the money demand for currency,  money multiplies will be reduced and hence the money supply. In order to investigate such a consequence, a theoretically based demand function for currency is specified and estimated by using Cointegration method and time-series annual data for the period 1338-1391.
Estimation result indicate that the issuance of larger denominated bank notes and coins will increase the amount of notes and coins demand by the public. This will increase the ratio of  bank notes to bank deposits and hence will reduce  the money multiplier which is of  an deflationary nature.
In order to asses the inflationary aspect of redenomination polices in countries that carried out such a policy, a model based on quantity theory of money is derived and  estimate for some of the countries that the needed data were available . The results indicate that currency redenomination  not only didn't bring about inflation, but in some countries resulted in the reduction of the rate of inflation.
Keywords: Dropping Zeroes from Rial, Revaluation of National Currency, Redenomination, Inflation, Co-Integration
Full-Text [PDF 554 kb]   (221 Downloads)    
notification: Research | Subject: Special
Received: 2014/03/1 | Accepted: 2014/06/6 | Published: 2013/12/22


XML   Persian Abstract   Print



Rights and permissions
Creative Commons License This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
1, Issue 1 (Modern Theories of Economy,Volume 1, No.1,February, 2014 2013) Back to browse issues page