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An Econometric Investigation of Dollarization in Egypt

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  • Tarik H. Alami

    (American University of Beirut)

Abstract

In countries with underdeveloped financial markets, interest rate restrictions, depreciating currency and high rates of inflation, the store of value function of domestic money is disabled. Consequently, foreign money becomes the only alternative liquid form of financial wealth. Contradicting existing empirical results on Egypt, our results for the period 1981-1993 provide evidence on the importance of the rate of return on foreign currency deposits in determining the demand for these deposits. Therefore, foreign currency deposits are held to protect wealth (dollarization) rather than to facilitate transactions (currency substitution). These results imply that foreign currency deposits should not be included in transactions oriented monetary aggregates when trying to assess the proper instruments and channels of monetary policy.

Suggested Citation

  • Tarik H. Alami, 1999. "An Econometric Investigation of Dollarization in Egypt," Working Papers 9923, Economic Research Forum, revised Aug 1999.
    • Handle: RePEc:erg:wpaper:9923
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