{
  "title": "Foreign Currency Deposits and the Demand for Money in Developing Countries",
  "publication": "IMF Working Papers, January 1, 1992",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/foreign-currency-deposits-and-the-demand-for-money-in-developing-countries-719",
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  "summary": "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.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Paper examines the relative demands for domestic and foreign currency deposits by residents of developing countries.\n- Formulates and estimates a dynamic currency substitution model that incorporates forward-looking rational expectations.\n- Empirical work is conducted for a group of ten developing countries.\n- From an empirical standpoint, the forward-looking framework adopted here is superior to the conventional currency-substitution model."
    },
    {
      "heading": "Methodology",
      "content": "- Develops a dynamic currency substitution model with forward-looking rational expectations.\n- Estimates the model for a sample of ten developing countries to evaluate determinants of deposit choice between domestic money and foreign currency deposits held abroad."
    },
    {
      "heading": "Key findings",
      "content": "- The foreign rate of interest is an important factor in the choice between holding domestic money or switching to foreign currency deposits held abroad.\n- The expected rate of depreciation of the parallel market exchange rate is an important factor in the choice between holding domestic money or switching to foreign currency deposits held abroad.\n- The forward-looking framework adopted here is empirically superior to the conventional currency-substitution model."
    },
    {
      "heading": "Implications for policy and practice",
      "content": "- Policy analysis of currency substitution should account for forward-looking expectations, particularly expectations about parallel market exchange rate depreciation.\n- Interest rate differentials between domestic and foreign currencies are key determinants of residents' deposit allocation decisions and thus relevant for monetary management in developing countries."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subjects: Bank deposits, Currencies, Currency markets, Dollarization, Financial markets, Financial services, Foreign exchange, Monetary policy, Money, Multiple currency practices\n- Keywords: Bank deposits, Currencies, currency holding, Currency markets, currency ratio, Dollarization, exchange rate, foreign currency, foreign-currency bond, Middle East, Multiple currency practices, ratio target, unit of account, WP\n\nSource: Foreign Currency Deposits and the Demand for Money in Developing Countries, Mohsin S. Khan and Pierre-Richard Agénor, January 1, 1992, IMF Working Paper No. 1992/001, Pages: 40, DOI: https://doi.org/10.5089/9781451931303.001\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/foreign-currency-deposits-and-the-demand-for-money-in-developing-countries-719"
    }
  ],
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    "Authors: Mohsin S. Khan, Pierre-Richard Agénor",
    "Published: January 1, 1992",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451931303.001",
    "Paper examines the relative demands for domestic and foreign currency deposits by residents of developing countries.",
    "Formulates and estimates a dynamic currency substitution model that incorporates forward-looking rational expectations.",
    "Empirical work is conducted for a group of ten developing countries.",
    "From an empirical standpoint, the forward-looking framework adopted here is superior to the conventional currency-substitution model.",
    "Develops a dynamic currency substitution model with forward-looking rational expectations.",
    "Estimates the model for a sample of ten developing countries to evaluate determinants of deposit choice between domestic money and foreign currency deposits held abroad.",
    "The foreign rate of interest is an important factor in the choice between holding domestic money or switching to foreign currency deposits held abroad.",
    "The expected rate of depreciation of the parallel market exchange rate is an important factor in the choice between holding domestic money or switching to foreign currency deposits held abroad.",
    "The forward-looking framework adopted here is empirically superior to the conventional currency-substitution model.",
    "Policy analysis of currency substitution should account for forward-looking expectations, particularly expectations about parallel market exchange rate depreciation.",
    "Interest rate differentials between domestic and foreign currencies are key determinants of residents' deposit allocation decisions and thus relevant for monetary management in developing countries.",
    "Subjects: Bank deposits, Currencies, Currency markets, Dollarization, Financial markets, Financial services, Foreign exchange, Monetary policy, Money, Multiple currency practices",
    "Keywords: Bank deposits, Currencies, currency holding, Currency markets, currency ratio, Dollarization, exchange rate, foreign currency, foreign-currency bond, Middle East, Multiple currency practices, ratio target, unit of account, WP"
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