Do Foreign Currency Deposits Promote or Deter Financial Development in Low-Income Countries? An Empirical Analysis of Cross-Country Data

Koji Kubo

No 87, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: Foreign currency deposits (FCD) are prevalent in many low-income developing countries, but their impact on bank lending has rarely been examined. An examination of cross-country data indicates that a higher proportion of FCD in total deposits is associated with growth in private credit only in inflationary circumstances (over 24 percent of the annual inflation rate). FCD can lead to a decline in private credit below this threshold level of inflation. Given that FCD exhibit persistence, deregulating them in low-income countries may do more harm than good on financial development in the long term, notably after successful containment of inflation.

Keywords: Developing countries; Money; Banks; Finance; Foreign currency deposits; Financial development; Low-income countries; Inflation; Dollarization; 発展途上国; 貨幣; 銀行; 金融; インフレーション (search for similar items in EconPapers)
JEL-codes: F36 G21 (search for similar items in EconPapers)
Date: 2007-01-01
New Economics Papers: this item is included in nep-cba
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 87. 2007-01-01

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