Economics, Econometrics and Finance
4 years ago

Foreign currency deposits fuel inflation and impact exchange rates significantly.

IMF Working Paper
Foreign Currency Deposits: Implications for Macroeconomic Policies
Andreas C. Georgiou

Paper Summary

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Foreign currency deposits can impact inflation and exchange rates. When part of the money supply is tied to foreign currency, inflation can increase under a floating exchange rate. However, under a fixed exchange rate, the effect of devaluation is reduced. Following a real exchange rate rule, the presence of foreign currency deposits can affect the tradeoff between depreciation/inflation and the real exchange rate level. Financial programming may also be influenced by these deposits.