Money and Credit Under Currency Substitution

IMF Working Papers, November 1, 1992

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Money and Credit Under Currency Substitution

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Bibliographic details

• Authors: Carlos A. Rodriguez
• Published: November 1, 1992
• Series: IMF Working Papers

Research question and scope

• Examines the effects on the supply of money and credit of a repatriation of foreign assets in an economy subject to currency substitution.
• Focuses on cases where the change in the location of deposits is not compensated by an increase in money demand.
• Illustrated with data from Argentina and Peru where local banks have been authorized to capture dollar deposits from residents.

Key findings

• In the absence of 100 percent reserve requirements, repatriation of foreign assets (deposit relocation) induces a credit boom.
• The credit boom resolves via:
  • a transitory current account deficit, and
  • real currency appreciation.
• Empirical illustration uses recent experience in Argentina and Peru (authorization of local banks to capture dollar deposits).

Policy implications and mechanisms

• Reserve requirement stance matters: less than 100 percent reserve requirements permit domestic credit expansion when foreign deposits are repatriated.
• Without a concurrent rise in money demand, deposit repatriation increases credit supply and affects external and real exchange dynamics.
• Supervisory and monetary authorities should account for cross-border deposit location changes when assessing monetary conditions and external balances.

Publication and metadata

• Author: Carlos A. Rodriguez
• Date: November 1, 1992
• Series: Working Paper No. 1992/099
• Issue: 099
• Volume: 1992
• Pages: 18
• Stock No: WPIEA0991992
• ISBN: 9781451852196
• ISSN: 1018-5941
• Subjects: Balance of payments; Capital inflows; Credit; Currencies; Demand for money; Monetary policy; Money; Reserve requirements
• Keywords: Capital inflows; central bank; Credit; Currencies; Demand for money; dollar; dollar account; dollar cost of living; dollar deposit; dollar value; foreign currency; Global; Reserve requirements; value of the CPI; WP

Notice

• This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Source: Money and Credit Under Currency Substitution — IMF Working Papers 1992, 099 (1992).