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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. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, Elsevier, vol. 20(1-2), pages 1-20, February.
  2. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  3. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  4. Mohamed El-Erian, 1988. "Currency Substitution in Egypt and the Yemen Arab Republic: A Comparative Quantitative Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 85-103, March.
  5. Guillermo Calvo & Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy," IMF Working Papers 90/110, International Monetary Fund.
  6. Russell Davidson & James G. MacKinnon, 1981. "Tests for Model Specification in the Presence of Alternative Hypotheses: Some Further Results," Working Papers, Queen's University, Department of Economics 430, Queen's University, Department of Economics.
  7. Greenwood, Jeremy & Kimbrough, Kent P., 1987. "Foreign exchange controls in a black market economy," Journal of Development Economics, Elsevier, Elsevier, vol. 26(1), pages 129-143, June.
  8. Swamy, P. A. V. B. & Tavlas, George S., 1989. "Modeling buffer stock money: an appraisal," Journal of Policy Modeling, Elsevier, Elsevier, vol. 11(4), pages 593-612.
  9. Wickens, Michael R, 1986. "The Estimation of Linear Models with Future Rational Expectations by Efficient and Instrumental Variable Methods," CEPR Discussion Papers, C.E.P.R. Discussion Papers 111, C.E.P.R. Discussion Papers.
  10. 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.
  11. 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, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
  12. Cuthbertson, Keith & Taylor, Mark P, 1987. "The Demand for Money: A Dynamic Rational Expectations Model," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(388a), pages 65-76, Supplemen.
  13. Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 50(1), pages 101-118, June.
  14. Muscatelli, V A, 1988. "Alternative Models of Buffer Stock Money: An Empirical Investigation," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 35(1), pages 1-21, February.
  15. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  16. 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, University of Chicago Press, vol. 36(3), pages 543-58, April.
  17. C. L. Ramirez-Rojas, 1985. "Currency Substitution in Argentina, Mexico, and Uruguay (Substitution de monnaie en Argentine, au Mexique et en Uruguay) (Sustitución de moneda en Argentina, México y Uruguay)," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 629-667, December.
  18. Hendry, David F. & Pagan, Adrian R. & Sargan, J.Denis, 1984. "Dynamic specification," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 18, pages 1023-1100 Elsevier.
  19. Guillermo Calvo & Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries," IMF Working Papers 92/40, International Monetary Fund.
  20. Keith Cuthbertson & Mark P. Taylor, 1990. "Money demand, expectations, and the forward-looking model," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 289-324.
  21. 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.
  22. Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 026208189x, December.
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