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Foreign Currency Deposits and International Liquidity Shortages in Pakistan

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Author Info

  • Abbas Mirakhor

    (IMF's Finance Department.)

  • Iqbal Zaidi

    (IMF's Finance Department.)

Abstract

This paper studies the implications of foreign currency deposits (FCDs) for international liquidity shortages in Pakistan. The analysis focuses on how the large volume of FCDs and the specific institutional characteristics of those deposits have made the Pakistan economy highly vulnerable to exogenous shocks. The analysis shows that FCDs created another channel for government borrowing, and fiscal sustainability in a “closed” system may be very different from sustainability in a more “open” system. There is a need to think of these issues in terms of total balance sheet vulnerability, and we recommend measures that would make domestic-currency-denominated assets attractive to investors.

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Bibliographic Info

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 45 (2006)
Issue (Month): 1 ()
Pages: 49-85

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Handle: RePEc:pid:journl:v:45:y:2006:i:1:p:49-85

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Related research

Keywords: Capital Account Liberalisation; Financial Development; Dollarisation;

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References

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  1. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc.
  2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  3. Ricardo Caballero & Arvind Krishnamurthy, 2004. "Exchange Rate Volatility and the Credit Channel in Emerging Markets: A Vertical Perspective," NBER Working Papers 10517, National Bureau of Economic Research, Inc.
  4. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  5. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  6. Leonardo Bartolini & Allan Drazen, 1996. "Capital Account Liberalization as a Signal," NBER Working Papers 5725, National Bureau of Economic Research, Inc.
  7. Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
  8. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-87, May.
  9. Ricardo J. Caballero, 2003. "The Future of the IMF," American Economic Review, American Economic Association, vol. 93(2), pages 31-38, May.
  10. Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
  11. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  12. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 165-216, 04.
  13. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Rubina Hassan, 2011. "The Reserve Equation and the Analytics of Pakistan’s Monetary Policy," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 111-142, Jan-Jun.
  2. Irfan ul Haque, 2011. "The Capital Account and Pakistani Rupee Convertibility: Macroeconomic Policy Challenges," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 95-121, September.
  3. M. Idrees Khawaja & Musleh-ud Din, 2007. "Instrument of Managing Exchange Market Pressure: Money Supply or Interest Rate," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 381-394.

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