The Risks of Currency Substitution: A Case of Montenegro

This paper deals with the risks of the adapting of a foreign currency as country's legal tender. Giving away its monetary sovereignty, the economy stays fragile when the shocks of business cycle occur. It is visible on a case of Montenegro. In 1996, because of high inflation in Yugoslavia, Montenegro adapted German mark as its currency and it has kept up in the regime of currency substitution even after the introduction of Euro. Its economy experienced high growth of GDP before crisis and deep recession afterwards. This paper uses a theory of optimum currency area as its theoretical background and analyses adjustment to the asymmetrical shocks and a business cycle in case of the country with currency substitution regime.