Foreign Currency Deposits and the Demand for Money in Developing Countries

Mohsin Khan and Pierre-Richard Agénor

No 1992/001, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; foreign currency; exchange rate; currency ratio; currency holding; unit of account; foreign-currency bond; ratio target; Bank deposits; Currencies; Dollarization; Currency markets; Multiple currency practices; Middle East (search for similar items in EconPapers)
Pages: 40
Date: 1992-01-01
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Citations: View citations in EconPapers (14)

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Journal Article: Foreign currency deposits and the demand for money in developing countries (1996)
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