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"Closet dollars" and taxes

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  • Franke, Günter
  • Benninga, Simon

Abstract

Israelis commonly hold substantial foreign currency balances at home. This paper examines the phenomenon of these "closet dollars." We show that closet dollars are attractive only if there exists a positive probability that domestic deposits will pay negative dollar rates of return. If such negative rates of return are associated with changes in the depositor's tax bill, then low-tax consumers are most attracted to closet dollars. In addition we show that potential central bank default and transactions costs will tend to increase the volume of closet dollars.

Suggested Citation

  • Franke, Günter & Benninga, Simon, 1989. ""Closet dollars" and taxes," Discussion Papers, Series II 77, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:77
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    References listed on IDEAS

    as
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