How do euro deposits in CESEE react to exchange rate shocks?

In this paper, we investigate the effects of unanticipated exchange rate movements on euro deposits in selected Central, Eastern and Southeastern European (CESEE) economies that are characterized by considerable deposit euroization and flexible exchange rate regimes. In doing so, we examine household deposits and deposits of nonfinancial corporations (NFCs) separately. Our empirical approach involves a two-step process. First, we estimate country-specific vector autoregressive (VAR) models, identify structural shocks using sign restrictions and then compute impulse response functions to an exogenous exchange rate shock. We find that both households’ and NFCs’ euro deposits decrease in response to an exogenous domestic currency appreciation, with the effect being more pronounced on NFCs. Second, we use country-specific time-varying parameter regressions to estimate the time-varying sensitivity of euro deposits to the identified exchange rate shocks. Results vary significantly across countries, sectors and time periods. In general, our findings indicate that the euro deposits of NFCs are more sensitive to exchange rate shocks than those of households. Moreover, the sensitivity of NFC deposits exhibits greater time variation, suggesting that NFCs are more responsive to changing economic conditions than households.