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

Ivana Rajkoviæ and Branko Uroseviæ
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Ivana Rajkoviæ: National Bank of Serbia
Branko Uroseviæ: National Bank of Serbia

Working papers from 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.

Keywords: Permanent and transitory dollarization; Transition economies (search for similar items in EconPapers)
JEL-codes: C33 E51 E58 G21 G32 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2014-12
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Persistent link: https://EconPapers.repec.org/RePEc:nsb:wppnbs:28

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