## Foreign Currency Deposits and the Demand for Money in Developing Countries

_IMF Working Papers, January 1, 1992_

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**Canonical URL:** [Foreign Currency Deposits and the Demand for Money in Developing Countries](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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## Bibliographic details
- Authors: Mohsin S. Khan, Pierre-Richard Agénor
- Published: January 1, 1992
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451931303.001

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### Overview
- 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.

### Methodology
- 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.

### Key findings
- 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.

### Implications for policy and practice
- 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 and keywords
- 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

*Source: 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*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/foreign-currency-deposits-and-the-demand-for-money-in-developing-countries-719_