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Determinants of Foreign Currency Borrowing in the New Member States of the EU

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  • Christoph B. Rosenberg
  • Marcel Tirpák
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    Abstract

    The paper investigates the determinants of foreign currency borrowing by the private sector in the new member states of the European Union. We find that striking differences in patterns of foreign currency borrowing between countries are explained by the loan-to-deposit ratios, openness, and the interest rate differential. Joining the EU appears to have played an important role, by providing direct access to foreign funding, offering hedging opportunities through greater openness, lending credibility to exchange rate regimes, and raising expectations of imminent euro adoption. The empirical evidence suggests that regulatory policies to slow foreign currency borrowing have had only limited success.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/173.

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    Length: 24
    Date of creation: 01 Jul 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/173

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    Keywords: Central and Eastern Europe; European Union; External borrowing; Foreign investment; Exchange rate regimes; foreign currency; exchange rate; foreign exchange; inflation; currency risk; exchange rate volatility; exchange rates; exchange rate regime; monetary policy; flexible exchange rate; flexible exchange rate regime; exchange rate risk; real exchange rate; nominal interest rates; exchange rate stability; nominal interest rate; currency units; exchange rate movements; exchange risk; exchange rate arrangements; real interest rates; exchange rate mechanism; currency boards; exchange rate pegs; real interest rate; rigid exchange rate regime; foreign exchange risk; nominal exchange rates; financial stability; exchange rate variability; flexible exchange rate regimes; rigid exchange rate regimes; classification of exchange rate; actual inflation;

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    1. Burkhard Drees & Ceyla Pazarbasioglu, 1998. "The Nordic Banking Crisis," IMF Occasional Papers 161, International Monetary Fund.
    2. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4030, C.E.P.R. Discussion Papers.
    3. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 329-368.
    4. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, Elsevier, vol. 59(2), pages 323-347, March.
    5. Cottarelli, Carlo & Dell'Ariccia, Giovanni & Vladkova-Hollar, Ivanna, 2005. "Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in Central and Eastern Europe and in the Balkans," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(1), pages 83-104, January.
    6. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2007. "Financial dollarization: the role of banks and interest rates," Working Paper Series, European Central Bank 0748, European Central Bank.
    7. Brzoza-Brzezina, Michał & Chmielewski, Tomasz & Niedźwiedzińska, Joanna, 2010. "Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter?," Working Paper Series, European Central Bank 1187, European Central Bank.
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    Cited by:
    1. Brown, M. & Ongena, S. & Yesin, P., 2011. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Discussion Paper, Tilburg University, Center for Economic Research 2011-099, Tilburg University, Center for Economic Research.
    2. Brzoza-Brzezina, Michał & Chmielewski, Tomasz & Niedźwiedzińska, Joanna, 2007. "Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter?," MPRA Paper 6759, University Library of Munich, Germany.
    3. Martin Brown & Karolin Kirschenmann & Steven Ongena, 2011. "Foreign Currency Loans - Demand or Supply Driven?," Working Papers 2011-02, Swiss National Bank.
    4. Marina Tkalec, 2011. "The Dynamics of Deposit Euroization in European Post-transition Countries: Evidence from Threshold VAR," Working Papers, The Institute of Economics, Zagreb 1102, The Institute of Economics, Zagreb.
    5. Neanidis, Kyriakos C. & Savva, Christos S., 2009. "Financial dollarization: Short-run determinants in transition economies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(10), pages 1860-1873, October.
    6. ROMAN Angela & SARGU Alina Camelia, 2012. "Lending In Foreign Currency And Current Challenges At European Level," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 588-594, December.
    7. Pirovano, Mara, 2012. "Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states," Economic Systems, Elsevier, Elsevier, vol. 36(3), pages 372-390.
    8. Atish R. Ghosh & Jonathan David Ostry & Mahvash Saeed Qureshi, 2014. "Exchange Rate Management and Crisis Susceptibility: A Reassessment," IMF Working Papers, International Monetary Fund 14/11, International Monetary Fund.
    9. Sokolov, Yuri, 2009. "Interaction between market and credit risk: Focus on the endogeneity of aggregate risk," MPRA Paper 18245, University Library of Munich, Germany.
    10. Johannes Pann & Reinhardt Seliger & Julia Übeleis, 2010. "Foreign Currency Lending in Central, Eastern and Southeastern Europe: The Case of Austrian Banks," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 20, pages 56-76.
    11. Aron Gereben & Ferenc Karvalits & Zalan Kocsis, 2011. "Monetary policy challenges during the crisis in a small open dollarised economy: the case of Hungary," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 179-188 Bank for International Settlements.
    12. Michael Knogler & Wolfgang Quaisser, 2009. "Wachstumseinbruch Mittel- und Osteuropas im Spiegel der Prognosen," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 62(09), pages 26-33, 05.
    13. Brown, Martin & Ongena, Steven & Yesin, Pinar, 2011. "Foreign currency borrowing by small firms in the transition economies," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 20(3), pages 285-302, July.
    14. Gábor Pellényi & Péter Bilek, 2009. "Foreign Currency Borrowing: The Case of Hungary," Working Paper / FINESS, DIW Berlin, German Institute for Economic Research 5.4, DIW Berlin, German Institute for Economic Research.

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