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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. Honohan, Patrick, 2007. "Dollarization and exchange rate fluctuations," Policy Research Working Paper Series 4172, The World Bank.
  2. Eduardo Levy Yeyati, 2006. "Financial dollarization: evaluating the consequences," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 21(45), pages 61-118, 01.
  3. Galiani, Sebastian & Levy Yeyati, Eduardo & Schargrodsky, Ernesto, 2003. "Financial dollarization and debt deflation under a currency board," Emerging Markets Review, Elsevier, Elsevier, vol. 4(4), pages 340-367, December.
  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, Elsevier, vol. 73(2), pages 223-250, November.
  5. Carlos Óscar Arteta, 2003. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?," International Finance, EconWPA 0303005, EconWPA.
  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. Hans Genberg, 2002. "Currency Substitution in Anticipation of EU Accession," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 08-2002, Economics Section, The Graduate Institute of International Studies.
  8. 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.
  9. Luca, Alina & Petrova, Iva, 2008. "What drives credit dollarization in transition economies?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(5), pages 858-869, May.
  10. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, Elsevier, vol. 59(2), pages 323-347, March.
  11. Honig, Adam, 2009. "Dollarization, exchange rate regimes and government quality," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(2), pages 198-214, March.
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Cited by:
  1. Mariya Hake & Fernando Lopez-Vicente & Luis Molina, 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), Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-35.
  2. Stephan Barisitz, 2011. "Nonperforming Loans in CESEE – What Do They Comprise?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 46-68.
  3. Kyriakos C. Neanidis & Christos S. Savva, 2013. "Institutions and Financial Dollarization: Indirect Effects based on a Policy Experiment," Centre for Growth and Business Cycle Research Discussion Paper Series, Economics, The Univeristy of Manchester 187, Economics, The Univeristy of Manchester.
  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. Fidrmuc, Jarko & Hake, Mariya & Stix, Helmut, 2013. "Households’ foreign currency borrowing in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(6), pages 1880-1897.
  6. repec:onb:oenbwp:y::i:171:b:1 is not listed on IDEAS
  7. Jesús Crespo Cuaresma & Jarko Fidrmuc & Mariya Hake, 2011. "Determinants of Foreign Currency Loans in CESEE Countries: A Meta-Analysis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 69-87.

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