Hysteresis in a simple model of currency substitution

A cash-in-advance model in which the cost of buying goods with a foreign currency is decreasing in the economy's accumulated experience in transacting in the foreign currency is shown to display hysteresis in money velocity; that is, a temporary increase in expected inflation can cause a permanent increase in velocity. In addition, the model implies that the domestic currency does not have to dominate the foreign currency in rate of return to induce agents to stop using the foreign currency. Finally, inflation rates that trigger currency substitution need not be associated with steady states in which the domestic currency disappears from circulation.