DO FOREIGN CURRENCY DEPOSITS PROMOTE OR DETER FINANCIAL INTERMEDIARY DEVELOPMENT IN LOW-INCOME COUNTRIES? AN EMPIRICAL ANALYSIS OF CROSS-COUNTRY DATA

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  • A preliminary version of this paper was circulated as Discussion Paper No. 87, Institute of Developing Economies (IDE), January 2007. The author is grateful for the valuable comments and suggestions made by Tsunehiro Otsuki, anonymous referees of the journal, and colleagues at the IDE. Any remaining errors are the responsibility of the author.

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 more private credit only in inflationary circumstances. FCD can lead to a decline in private credit below a certain threshold level of inflation. Given that FCD exhibit persistence, deregulating them in low-income countries could cause more harm than good to financial intermediary development in the long term.

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