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Dollarization of Deposits in the Short and Long Run: Evidence from CESE Countries

Branko Urošević Author-Email: Urosevic@ekof.bg.ac.rs and Ivana Rajković Author-Email: Ivana.rajkovic@nbs.rs
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Branko Urošević Author-Email: Urosevic@ekof.bg.ac.rs: National Bank of Serbia; University of Belgrade, Faculty of Economics, Serbia; CESifo Research Network, Munich, Germany
Ivana Rajković Author-Email: Ivana.rajkovic@nbs.rs: Corresponding author National Bank of Serbiа, Belgrade, Serbia

Panoeconomicus, 2017, vol. 64, issue 1, 31-44

Abstract: In this paper, we study the drivers of permanent and transitory deposit dollarization for 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 an additional empirical validation of the MVP method as the standard tool for analyzing financial dollarization. In the long-run, agents make savings decisions based on the relative volatilities of inflation and nominal depreciation rates and do not take into account the interest rate spread. Somewhat different factors affect dollarization in the short rather than in the long-run. Namely, apart from MVP share, transitory deposit dollarization is driven, also, by the real interest rate spread. Our results suggest that affecting dollarization through changes in the interest rate spread may have a short-term impact. In the long-run, however, for de-dollarization it is critical to reduce the volatility of inflation compared to the volatility of exchange rate depreciation.

Keywords: Permanent and transitory dollarization; Transition economies (search for similar items in EconPapers)
JEL-codes: C33 F31 G11 (search for similar items in EconPapers)
Date: 2017
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