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Foreign Currency Deposits and the Demand for Money in Developing Countries

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  • Mohsin S. Khan
  • Pierre-Richard Agénor

Abstract

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. The results indicate that the foreign rate of interest and the expected rate of depreciation of the parallel market exchange rate are important factors in the choice between holding domestic money or switching to foreign currency deposits held abroad. From an empirical standpoint, the forward-looking framework adopted here also turns out to be superior to the conventional currency-substitution model.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/1.

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Length: 40
Date of creation: 01 Jan 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/1

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  1. Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June.
  2. Guillermo Calvo & Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries," IMF Working Papers 92/40, International Monetary Fund.
  3. Hendry, David F. & Pagan, Adrian R. & Sargan, J.Denis, 1984. "Dynamic specification," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 18, pages 1023-1100 Elsevier.
  4. Wickens, Michael R, 1986. "The Estimation of Linear Models with Future Rational Expectations by Efficient and Instrumental Variable Methods," CEPR Discussion Papers 111, C.E.P.R. Discussion Papers.
  5. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  6. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  7. Cuthbertson, Keith & Taylor, Mark P, 1987. "The Demand for Money: A Dynamic Rational Expectations Model," Economic Journal, Royal Economic Society, vol. 97(388a), pages 65-76, Supplemen.
  8. Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026208189x, December.
  9. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  10. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
  11. Greenwood, Jeremy & Kimbrough, Kent P., 1987. "Foreign exchange controls in a black market economy," Journal of Development Economics, Elsevier, vol. 26(1), pages 129-143, June.
  12. Keith Cuthbertson & Mark P. Taylor, 1990. "Money demand, expectations, and the forward-looking model," Proceedings, Federal Reserve Bank of Cleveland, pages 289-324.
  13. Muscatelli, V A, 1988. "Alternative Models of Buffer Stock Money: An Empirical Investigation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 35(1), pages 1-21, February.
  14. Melvin, Michael, 1988. "The Dollarization of Latin America as a Market-Enforced Monetary Reform: Evidence and Implications," Economic Development and Cultural Change, University of Chicago Press, vol. 36(3), pages 543-58, April.
  15. Guillermo Calvo & Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy," IMF Working Papers 90/110, International Monetary Fund.
  16. Pesaran, M Hashem, 1991. "Costly Adjustment under Rational Expectations: A Generalization," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 353-58, May.
  17. Maurice Obstfeld, 1986. "Capital Controls, The Dual Exchange Rate, and Devaluation," NBER Working Papers 1324, National Bureau of Economic Research, Inc.
  18. Jagdeep S. Bhandari & Carlos A. Végh, 1990. "Dual Exchange Markets under Incomplete Separation: An Optimizing Model," IMF Staff Papers, Palgrave Macmillan, vol. 37(1), pages 146-167, March.
  19. MacKinnon, James G. & White, Halbert & Davidson, Russell, 1983. "Tests for model specification in the presence of alternative hypotheses : Some further results," Journal of Econometrics, Elsevier, vol. 21(1), pages 53-70, January.
  20. P.A.V.B. Swamy & George S. Tavlas, 1988. "Modeling buffer stock money - an appraisal," Finance and Economics Discussion Series 15, Board of Governors of the Federal Reserve System (U.S.).
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