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

  • Kubo, Koji

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
File Function: First version, 2007
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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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  1. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
  2. 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.
  3. Lee, Jaewoo, 1996. "Financial development by learning," Journal of Development Economics, Elsevier, vol. 50(1), pages 147-164, June.
  4. Honohan, Patrick & Shi, Anging, 2001. "Deposit dollarization and the financial sector in emerging economies," Policy Research Working Paper Series 2748, The World Bank.
  5. 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.
  6. 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.
  7. Enrica Detragiache & Thierry Tressel & Poonam Gupta, 2008. "Foreign Banks in Poor Countries: Theory and Evidence," Journal of Finance, American Finance Association, vol. 63(5), pages 2123-2160, October.
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