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Do Foreign Currency Deposits Promote or Deter Financial Development in Low-Income Countries? An Empirical Analysis of Cross-Country Data

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  • Kubo, Koji

Abstract

Foreign currency deposits (FCD) are prevalent in many low-income developing countries, but their impact on bank lending has rarely been examined. An examination of cross-country data indicates that a higher proportion of FCD in total deposits is associated with growth in private credit only in inflationary circumstances (over 24 percent of the annual inflation rate). FCD can lead to a decline in private credit below this threshold level of inflation. Given that FCD exhibit persistence, deregulating them in low-income countries may do more harm than good on financial development in the long term, notably after successful containment of inflation.

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File URL: http://ir.ide.go.jp/dspace/bitstream/2344/426/3/ARRIDE_Discussion_No.87_kubo.pdf
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Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 87.

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Date of creation: Jan 2007
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Publication status: Published in IDE Discussion Paper. No. 87. 2007.1
Handle: RePEc:jet:dpaper:dpaper87

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Keywords: Developing countries; Money; Banks; Finance; Foreign currency deposits; Financial development; Low-income countries; Inflation; Dollarization;

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  1. Amuedo-Dorantes, Catalina & Pozo, Susan, 2004. "Workers' Remittances and the Real Exchange Rate: A Paradox of Gifts," World Development, Elsevier, vol. 32(8), pages 1407-1417, August.
  2. Enrica Detragiache & Poonam Gupta & Thierry Tressel, 2006. "Foreign Banks in Poor Countries," IMF Working Papers 06/18, International Monetary Fund.
  3. Lee, Jaewoo, 1996. "Financial development by learning," Journal of Development Economics, Elsevier, vol. 50(1), pages 147-164, June.
  4. Claessens, Stijn & Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "How does foreign entry affect the domestic banking market?," Policy Research Working Paper Series 1918, The World Bank.
  5. Gianni De Nicoló & Patrick Honohan & Alain Ize, 2003. "Dollarization of the Banking System," IMF Working Papers 03/146, International Monetary Fund.
  6. Honohan, Patrick & Shi, Anging, 2001. "Deposit dollarization and the financial sector in emerging economies," Policy Research Working Paper Series 2748, The World Bank.
  7. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
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