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Financial Dollarization and European Union Membership

  • Kyriakos C. Neanidis

We analyse the effect of European Union (EU) membership on financial dollarization for the Central and Eastern European countries. Using a unique monthly data set that spans about two decades, we find that both the accession process towards EU membership and EU entry have a direct impact on deposit dollarization (DD) and loan dollarization (LD). EU membership reduces DD while it increases LD. The negative effect on DD captures the increased confidence of the private sector in the domestic currency, as they consider the EU admission process a reflection of their government's commitment to 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 of lower currency risk, which diminishes the cost of foreign currency borrowing. Copyright 2010 Blackwell Publishing Ltd

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Article provided by Wiley Blackwell in its journal International Finance.

Volume (Year): 13 (2010)
Issue (Month): 2 (08)
Pages: 257-282

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Handle: RePEc:bla:intfin:v:13:y:2010:i:2:p:257-282
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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. 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.
  3. 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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  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. Patrick Honohan, 2007. "Dollarization and Exchange Rate Fluctuations," The Institute for International Integration Studies Discussion Paper Series iiisdp201, IIIS.
  7. Carlos Óscar Arteta, 2003. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?," International Finance 0303005, EconWPA.
  8. Eduardo Levy Yeyati, 2006. "Financial dollarization: evaluating the consequences," Economic Policy, CEPR;CES;MSH, vol. 21(45), pages 61-118, 01.
  9. Luca, Alina & Petrova, Iva, 2008. "What drives credit dollarization in transition economies?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 858-869, May.
  10. Kyriakos C. Neanidis & Christos S. Savva, 2009. "Financial Dollarization: Short-Run Determinants in Transition Economies," Centre for Growth and Business Cycle Research Discussion Paper Series 113, Economics, The Univeristy of Manchester.
  11. Honig, Adam, 2009. "Dollarization, exchange rate regimes and government quality," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 198-214, March.
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