DO FOREIGN CURRENCY DEPOSITS PROMOTE OR DETER FINANCIAL INTERMEDIARY DEVELOPMENT IN LOW‐INCOME COUNTRIES? AN EMPIRICAL ANALYSIS OF CROSS‐COUNTRY DATA

Koji Kubo

The Developing Economies, 2008, vol. 46, issue 3, 264-289

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 more private credit only in inflationary circumstances. FCD can lead to a decline in private credit below a certain threshold level of inflation. Given that FCD exhibit persistence, deregulating them in low‐income countries could cause more harm than good to financial intermediary development in the long term.

Date: 2008
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