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Financial Dollarization and European Union Membership

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  • Kyriakos C. Neanidis

Abstract

We analyze the effect of European Union (EU) membership on financial dollarization for the Central and Eastern European countries. Using a unique monthly dataset that spans about two decades, we find that both the accession process toward EU membership and EU entry have a direct impact on deposit and loan dollarization. EU membership reduces deposit dollarization while it increases loan dollarization. The negative effect on deposit dollarization captures the increased confidence of the private sector in the domestic currency as they consider the EU admission process to reflect their government’s commitment in promoting policies of long-run currency stability. The positive impact on credit dollarization is the outcome of a greater convergence of exchange rates to the euro and the subsequent anticipation for a lower currency risk, which diminishes the cost of foreign currency borrowing.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr143.pdf
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Bibliographic Info

Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 143.

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Length: 24 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:man:cgbcrp:143

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  1. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
  2. Carlos Óscar Arteta, 2003. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?," International Finance 0303005, EconWPA.
  3. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2007. "Financial dollarization: the role of banks and interest rates," Working Paper Series 0748, European Central Bank.
  4. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
  5. Eduardo Levy Yeyati & Ernesto Schargrodsky & Sebastián Galiani, 2003. "Finantial Dollarization and Debt Deflation under a Currency Board," Business School Working Papers tres, Universidad Torcuato Di Tella.
  6. Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers findollarisation, Universidad Torcuato Di Tella.
  7. Neanidis, Kyriakos C. & Savva, Christos S., 2009. "Financial dollarization: Short-run determinants in transition economies," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1860-1873, October.
  8. Honohan, Patrick, 2007. "Dollarization and exchange rate fluctuations," Policy Research Working Paper Series 4172, The World Bank.
  9. Honig, Adam, 2009. "Dollarization, exchange rate regimes and government quality," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 198-214, March.
  10. M. Emranul Haque & Kyriakos C. Neanidis, 2009. "Financial Dollarization: Short-Run Determinants in Transition Economies," Centre for Growth and Business Cycle Research Discussion Paper Series 114, Economics, The Univeristy of Manchester.
  11. Luca, Alina & Petrova, Iva, 2008. "What drives credit dollarization in transition economies?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 858-869, May.
  12. Hans Genberg, 2002. "Currency Substitution in Anticipation of EU Accession," IHEID Working Papers 08-2002, Economics Section, The Graduate Institute of International Studies.
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Cited by:
  1. Neanidis, Kyriakos C. & Savva, Christos S., 2013. "Institutions and financial dollarization: Indirect effects based on a policy experiment," Economics Letters, Elsevier, vol. 121(3), pages 405-410.
  2. Tkalec, Marina, 2013. "The Dynamics of Deposit Euroization in European Post-Transition Countries: Evidence from Threshold VAR," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1.
  3. Fidrmuc, Jarko & Hake, Mariya & Stix, Helmut, 2013. "Households’ foreign currency borrowing in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1880-1897.
  4. Fidrmuc, Jarko & Hake, Mariya & Cuaresma, Jesús Crespo, 2011. "Determinants of Foreign Currency Loans in CESEE Countries: A Meta-Analysis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4.
  5. Barisitz, Stephan, 2011. "Nonperforming Loans in CESEE – What Do They Comprise?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4.
  6. repec:onb:oenbwp:y::i:171:b:1 is not listed on IDEAS
  7. Hake, Mariya & Molina, Luis & Lopez-Vicente, Fernando, 2014. "Do the Drivers of Loan Dollarization Differ between CESEE and Latin America? A Meta-Analysis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1.

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