Foreign Currency Deposits and the Demand for Money in Developing Countries

By Mohsin S. Khan, Pierre-Richard Agénor

January 1, 1992

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Mohsin S. Khan, and Pierre-Richard Agénor. Foreign Currency Deposits and the Demand for Money in Developing Countries, (USA: International Monetary Fund, 1992) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the relative demands for domestic and foreign currency deposits by residents of developing countries. A dynamic currency substitution model that incorporates forward-looking rational expectations is formulated and then estimated for a group of ten developing countries. The results indicate that the foreign rate of interest and the expected rate of depreciation of the parallel market exchange rate are important factors in the choice between holding domestic money or switching to foreign currency deposits held abroad. From an empirical standpoint, the forward-looking framework adopted here also turns out to be superior to the conventional currency-substitution model.

Subject: Bank deposits, Currencies, Currency markets, Dollarization, Financial markets, Financial services, Foreign exchange, Monetary policy, Money, Multiple currency practices

Keywords: Bank deposits, Currencies, Currency holding, Currency markets, Currency ratio, Dollarization, Exchange rate, Foreign currency, Foreign-currency bond, Middle East, Multiple currency practices, Ratio target, Unit of account, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1992/001
Stock No:

WPIEA0011992
ISBN:

9781451931303
ISSN:

1018-5941

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