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Is Loan Dollarization Contagious across Countries? Evidence from Transition Economies

Kyriakos Neanidis () and Christos Savva ()

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The Univeristy of Manchester

Abstract: We examine whether credit dollarization is contagious across countries with widely different experiences of the phenomenon and, if so, what factors contribute to such spillover effects. We analyse a unique monthly data set of credit dollarization for 23 transition economies. We proceed in two steps. First, we use a flexible bivariate regimeswitching model to simultaneously test for shift contagion and bi-directional pure contagion between high-dollarized and low-dollarized countries. We document widespread evidence of both shift and pure contagion in credit dollarization, the latter moving in both directions. Second, a multivariate analysis identifies the factors that promote pure contagion to be associated with (i) geographical proximity between countries, (ii) a common institutional environment within the EU, (iii) greater trade and banking connectivity, and (iv) the economic size of the country where contagion originates from.

Date: 2015
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