Foreign Currency Deposits: Implications for Macroeconomic Policies
IMF Working Papers, November 1, 1991
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- Foreign Currency Deposits: Implications for Macroeconomic Policies
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Bibliographic details
- Authors: Andréas Georgiou
- Published: November 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451946352.001
Summary and central findings
- The paper analyzes the relationship between foreign currency deposits (FCDs) and money.
- Indexation of part of the nominal money supply to the exchange rate, due to the presence of FCDs, will:
- increase the inflationary effects of monetary disequilibria under a floating exchange rate system; and
- reduce the effect of a devaluation of a usually fixed exchange rate.
- When a real exchange rate rule is followed, the presence of FCDs 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 FCDs.
Implications for monetary regimes and policy tradeoffs
- Floating exchange rate systems:
- FCDs index part of the nominal money supply to the exchange rate, amplifying inflationary effects from monetary disequilibria.
- Fixed exchange rate systems (subject to devaluation):
- FCDs reduce the inflationary impact of a devaluation.
- Real exchange rate rules:
- Presence of FCDs reduces the tradeoff between the rate of nominal depreciation/inflation and the level of the real exchange rate.
Effects on financial programming and macroeconomic analysis
- The presence of FCDs alters traditional relationships between money, prices, and exchange rates.
- Financial programming frameworks must account for indexation of money supply components to the exchange rate because this changes the transmission of monetary disequilibria and exchange rate adjustments into inflation and real exchange rate outcomes.
Subject classification and keywords
- Subject: Currencies, Demand for money, Foreign exchange, Inflation, Monetary base, Money, Prices, Real exchange rates
- Keywords: balance of payments, Currencies, Demand for money, Eastern Europe, excess demand, foreign currency, Inflation, interest income, Monetary base, money balance, money holding, money stock, money substitution, nominal exchange rate, presence of FCDs, price level, rate of depreciation, rate of inflation, Real exchange rates, substitution take, WP