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Carry Trade vs. Deposit-Driven Euroization

Nan Geng, Tiberiu Scutaru and Johannes Wiegand ()

No 2018/058, IMF Working Papers from International Monetary Fund

Abstract: Financial “euroization”—or “dollarization” outside of Central and Eastern Europe—is typically analyzed as a singular phenomenon that can be traced to a common set of factors. This paper argues that two types of euroization need to be distinguished, which have different causes, economic consequences, and policy implications: carry trade euroization that emerges when households and corporations seek to exploit interest rate differentials between foreign currency loans and local currency deposits, and deposit-driven euroization that is rooted in distrust in the local currency as a savings vehicle. We present a theoretical framework that sketches key features of both euroization types, and test it with data from 28 Emerging European and Central Asian economies.

Keywords: WP; interest rate; FX loan; Financial Dollarization; Euroization; Emerging Europe; carry trade euroization; FX position; repayment scheme; FX borrowing; loan origination; Loans; Currencies; Currency mismatches; Financial statements; Central and Eastern Europe; Central Asia; Europe; Global (search for similar items in EconPapers)
Pages: 29
Date: 2018-03-15
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