Foreign Currency Deposits: Implications for Macroeconomic Policies

Andréas Georgiou

No 1991/108, IMF Working Papers from International Monetary Fund

Abstract: This paper discusses the relationship between foreign currency deposits and money, and it shows that the indexation of part of the nominal money supply to the exchange rate, as a result of the presence of foreign currency deposits, will increase the inflationary effects of monetary disequilibria under a floating exchange rate system and will reduce the effect of a devaluation of a usually fixed exchange rate. When a real exchange rate rule is followed, the presence of foreign currency deposits implies that there is less of a tradeoff between the rate of nominal depreciation/inflation and the level of the real exchange rate. The paper shows how certain aspects of financial programming may be affected by the presence of these deposits.

Keywords: WP; balance of payments; rate of depreciation; money stock; foreign currency; price level; rate of inflation; nominal exchange rate; excess demand; substitution take; presence of FCDs; interest income; money substitution; money balance; money holding; Currencies; Demand for money; Real exchange rates; Monetary base; Inflation; Eastern Europe (search for similar items in EconPapers)
Pages: 37
Date: 1991-11-01
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