Foreign Currency Deposits and the Demand for Money in Developing Countries

40 Pages Posted: 15 Feb 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Date Written: January 1992

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.

JEL Classification: E41, F32, C52

Suggested Citation

Agenor, Pierre-Richard, Foreign Currency Deposits and the Demand for Money in Developing Countries (January 1992). IMF Working Paper, Vol. , pp. 1-40, 1992. Available at SSRN: https://ssrn.com/abstract=884506

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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