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

Listed author(s):
  • 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://hummedia.manchester.ac.uk/schools/soss/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
Handle: RePEc:man:cgbcrp:171
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Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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  1. Rainer Schweickert & Inna Melnykovska & Ansgar Belke & Ingo Bordon, 2011. "Prospective NATO or EU membership and institutional change in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 19(4), pages 667-692, October.
  2. 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.
  3. Michael Artis & Massimiliano Marcellino & Tommaso Proietti, 2004. "Characterising the Business Cycle for Accession Countries," Working Papers 261, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. 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.
  5. Christos S. Savva & Kyriakos C. Neanidis & Denise R. Osborn, 2010. "Business cycle synchronization of the euro area with the new and negotiating member countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 288-306.
  6. Altug, Sumru, 1989. "Time-to-Build and Aggregate Fluctuations: Some New Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 889-920, November.
  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. Stock, James H. & Watson, Mark, 2011. "Dynamic Factor Models," Scholarly Articles 28469541, Harvard University Department of Economics.
  9. Belke, Ansgar & Bordon, Ingo G. & Melnykovska, Inna & Schweickert, Rainer, 2009. "Prospective membership and institutional change in transition countries," Kiel Working Papers 1562, Kiel Institute for the World Economy (IfW).
  10. 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.
  11. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
  12. 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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