"Closet dollars" and taxes

Günter Franke () and Simon Benninga

No 77, Discussion Papers, Series II from University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy"

Abstract: Israelis commonly hold substantial foreign currency balances at home. This paper examines the phenomenon of these "closet dollars." We show that closet dollars are attractive only if there exists a positive probability that domestic deposits will pay negative dollar rates of return. If such negative rates of return are associated with changes in the depositor's tax bill, then low-tax consumers are most attracted to closet dollars. In addition we show that potential central bank default and transactions costs will tend to increase the volume of closet dollars.

Date: 1989
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kondp2:77

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