Assessing the demand for foreign currency through a value storage lens

This document analyzes the demand for dollars in Bolivia, emphasizing how individuals turn to foreign curren-cies as a refuge during periods of economic instability and de-valuation expectations. Using the autoregressive distributed lag model (ARDL), the analysis incorporates key variables, includ-ing the M2 money supply, real interest rate, inflation, and de-valuation expectations, to estimate a dollar demand function. The findings reveal that economic uncertainty and a preference for more stable assets significantly drive dollar demand. These results align with Cagan’s theory, highlighting the inverse re-lationship between inflation and the willingness to hold local currency. Quantitatively, the estimated demand for dollars in 2023 linked to these factors amounts to approximately $us760 million, providing a monthly monitoring tool. Dynamic simu-lations and structural impulse-response analysis further reveal that exchange rate shocks induce persistent contractions in real money demand, in contrast to inflation shocks, whose effects are more limited and short-lived. These findings highlight the role of the dollar as a value-preserving asset in volatile environ-ments and underscore how macroeconomic conditions and policy stability can shape portfolio decisions under currency co-circulation schemes.