FOREIGN-CURRENCY DEPOSITS AND THE DEMAND FOR MONEY IN DEVELOPING-COUNTRIES

This paper examines the relative demands for domestic and foreign curr ency deposits by residents of developing countries. A dynamic currency substitution model that incorporates forward-looking rational expecta tions is specified and estimated for a group of ten developing countri es. The results indicate that the foreign rate of interest and the exp ected rate of depreciation of the parallel market exchange rate are im portant factors in the choice between holding domestic money or foreig n currency deposits abroad. Furthermore, the model appears to fit the data better than a conventional partial-adjustment model.