Foreign Currency Deposits: Implications for Macroeconomic Policies
November 1, 1991
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Summary
This paper discusses the relationship between foreign currency deposits and money, and it shows that the indexation of part of the nominal money supply to the exchange rate, as a result of the presence of foreign currency deposits, will increase the inflationary effects of monetary disequilibria under a floating exchange rate system and will reduce the effect of a devaluation of a usually fixed exchange rate. When a real exchange rate rule is followed, the presence of foreign currency deposits 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 these deposits.
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
Pages:
37
Volume:
1991
DOI:
Issue:
108
Series:
Working Paper No. 1991/108
Stock No:
WPIEA1081991
ISBN:
9781451946352
ISSN:
1018-5941
