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Dollarization of deposits in short and long run: evidence from CESE countries

Author

Listed:
  • Ivana Rajkoviæ

    (National Bank of Serbia)

  • Branko Uroseviæ

    (National Bank of Serbia)

Abstract

We study drivers of permanent and transitory deposit dollarization on a sample of CESE countries using panel cointegration techniques. The results suggest that a positive cointegration relationship exists between permanent dollarization and minimum variance portfolio (MVP) share. This provides additional empirical validation of MVP method as the standard tool for analysing financial dollarization in the long run. In the long run agents make savings decisions based on relative volatilities of inflation and nominal depreciation rates and do not take into the account interest rate spread. In the short run dollarization exhibits persistence. Somewhat different factors affect dollarization in the short than in the long run. Namely, apart from MVP share, dollarization of deposits is in that case driven, also, by interest rate spread and nominal exchange rate movements. Our results suggest that affecting dollarization through change in the interest rate spread may have short term impact on dollarization. In the long run, however, for de-dollarization it is critical to reduce volatility of inflation compared to volatility of exchange rate depreciation.

Suggested Citation

  • Ivana Rajkoviæ & Branko Uroseviæ, 2014. "Dollarization of deposits in short and long run: evidence from CESE countries," Working papers 28, National Bank of Serbia.
    • Handle: RePEc:nsb:wpaper:28
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    More about this item

    Keywords

    Permanent and transitory dollarization; Transition economies;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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