Research seminar by Branko Urosevic (Belgrad University): «Dollarization of deposits in the short and the long run: evidence from CESE countries»

On Thursday, October 10 at 16.40 am International Laboratory Financial Economics will hold the Research Seminar.

Abstract: People of Central, Eastern and Southeast European (CESE) countries as well as many other emerging markets often save in foreign currencies. For countries which attempt to pursue flexible exchange rate policy, financial dollarization has significant repercussions and renders traditional monetary policy less effective. This paper investigates deposit euroization in CESE countries both in short and the long run. Using Beveridge-Nelson decomposition into permanent and transitory components, we find that a cointegrated relationship exists between the level of euroization and minimum variance portfolio. This provides additional empirical validation of minimum variance method as the standard tool for analyzing financial euroization in the long run. Moreover, we find that somewhat different factors drive euroization in the short and long run. In the short run euroization is seems to be primarily driven by nominal exchange rate movements (nominal depreciation and its volatility) but, apparently, not by inflation or its volatility.  On the other hand, in the long run agents seem to make savings decisions based on relative volatilities of inflation and nominal depreciation rates. Robustness checks confirm our findings. Some important policy implications are discussed.