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What is Driving Financial Dollarization in Transition Economies? A Dynamic Factor Analysis

  • Narayan K. Kishor
  • Kyriakos C. Neanidis

This paper investigates the impact of institutions on the dollarization of the domestic banking system by using a unique policy experiment: the accession process of countries to the European Union (EU). Using a dynamic factor model, we decompose fluctuations in financial dollarization for 24 transition economies into a world factor, an EU factor, and country-specific factors. The EU factor, which proxies for improvements in institutions under the set criteria for eventual membership, reveals the importance of institutions for the extent of …nancial dollarization over time. The results also indicate the asymmetric impact of improved institutions on the domestic bank’s balance sheets by inducing higher loan dollarization and lower deposit dollarization. The relative importance of the EU factor to the financial dollarization of a country is associated with the degree of comovement of its business cycle with that of the EU.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr171.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 171.

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Length: 32 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:man:cgbcrp:171
Contact details of provider: Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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  1. Sumru Altug, 1986. "Time to build and aggregate fluctuations: some new evidence," Working Papers 277, Federal Reserve Bank of Minneapolis.
  2. Artis, Michael J & Marcellino, Massimiliano & Proietti, Tommaso, 2004. "Characterizing the Business Cycle for Accession Countries," CEPR Discussion Papers 4457, C.E.P.R. Discussion Papers.
  3. Christos S. Savva & Kyriakos C. Neanidis & Denise R. Osborn, 2007. "Business Cycle Synchrinization of the Euro Area with the New and Negotiating Member Countries," University of Cyprus Working Papers in Economics 7-2007, University of Cyprus Department of Economics.
  4. 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.
  5. Vieira, Fabrício A.C. & Holland, Márcio & Resende, Marco F., 2012. "Financial dollarization and systemic risks: New empirical evidence," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1695-1714.
  6. Neanidis, Kyriakos C. & Savva, Christos S., 2011. "Nominal uncertainty and inflation: The role of European Union membership," Economics Letters, Elsevier, vol. 112(1), pages 26-30, July.
  7. Honig, Adam, 2009. "Dollarization, exchange rate regimes and government quality," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 198-214, March.
  8. Honig, Adam, 2005. "Fear of floating and domestic liability dollarization," Emerging Markets Review, Elsevier, vol. 6(3), pages 289-307, September.
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