Assessing the demand for foreign currency through a value storage lens
DOI:
https://doi.org/10.23881/idupbo.025.2-6eKeywords:
Foreign currency demand, Store of value, Currency substitutionAbstract
This document analyzes the demand for dollars in Bolivia, emphasizing how individuals turn to foreign currencies as a refuge during periods of economic instability and devaluation expectations. Using the autoregressive distributed lag model (ARDL), the analysis incorporates key variables, including the M2 money supply, real interest rate, inflation, and devaluation expectations, to estimate a dollar demand function. The findings reveal that economic uncertainty and a preference for more stable assets significantly drive dollar demand. These results align with Cagan’s theory, highlighting the inverse relationship between inflation and the willingness to hold local currency. Quantitatively, the estimated demand for dollars in 2023 linked to these factors amounts to approximately $us760 million, providing a monthly monitoring tool. Dynamic simulations and structural impulse-response analysis further reveal that exchange rate shocks induce persistent contractions in real money demand, in contrast to inflation shocks, whose effects are more limited and short-lived. These findings highlight the role of the dollar as a value-preserving asset in volatile environments and underscore how macroeconomic conditions and policy stability can shape portfolio decisions under currency co-circulation schemes.Downloads
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