Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-23T07:04:09.016Z Has data issue: false hasContentIssue false
  • English
  • Français

WHAT IS DRIVING FINANCIAL DOLLARIZATION IN TRANSITION ECONOMIES? A DYNAMIC FACTOR ANALYSIS

Published online by Cambridge University Press:  23 December 2013

Narayan K. Kishor  and
Kyriakos C. Neanidis
Narayan K. Kishor*
Affiliation:
University of Wisconsin–Milwaukee
Kyriakos C. Neanidis
Affiliation:
University of Manchester and Centre for Growth and Business Cycle Research
*
Address correspondence to: Narayan K. Kishor, Department of Economics, University of Wisconsin–Milwaukee, Milwaukee, WI 53201, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper investigates the impact of institutions on the dollarization of the domestic banking system using a unique policy experiment: the process of accession of countries to the European Union (EU). Using a dynamic factor model, we decompose fluctuations in financial dollarization for 24 transition economies into a common factor, an EU factor, a non-EU factor, and country-specific factors. The EU factor, which proxies for improvements in institutions under the set criteria for eventual membership, reveals the importance of institutions for the extent of financial dollarization over time. The results also indicate the asymmetric impact of improved institutions on the domestic bank's balance sheets by inducing higher loan dollarization and lower deposit dollarization. The relative importance of the EU factor to the financial dollarization of a country is associated to the degree of comovement of its business cycle with that of the EU.

Keywords

Financial DollarizationInstitutionsEuropean Union
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 4: Empirical Analysis of Business Cycles, Financial Markets, and Inflation: Essays in Honor of Charles Nelson , June 2015 , pp. 816 - 835
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

De Nicoló, Gianni, Honohan, Patrick, and Ize, Alain (2005) Dollarization of bank deposits: Causes and consequences. Journal of Banking and Finance 29, 1697–1727.CrossRefGoogle Scholar
Ecofin (2000) Council of the European Union press release 13055/00.Google Scholar
Firdmuc, Jarko and Korhonen, Iikka (2004) The Euro goes east: Implications of the 2000–2002 economic slowdown for synchronization of business cycles between the euro area and CEECs. Comparative Economic Studies 46, 45–62.Google Scholar
Furceri, Davide and Karras, Georgios (2006) Are the new EU members ready for the EURO? A comparison of costs and benefits. Journal of Policy Modeling 28, 25–38.CrossRefGoogle Scholar
Harvey, Andrew C. (1989) Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge, UK: Cambridge University Press.Google Scholar
Honig, Adam (2005) Fear of floating and domestic liability dollarization. Emerging Markets Review 6, 289–307.CrossRefGoogle Scholar
Honig, Adam (2009) Dollarization, exchange rate regimes and government quality. Journal of International Money and Finance 28, 198–214.CrossRefGoogle Scholar
Honohan, Patrick (2008) The retreat of deposit dollarization. International Finance 11, 247–268.CrossRefGoogle Scholar
International Monetary Fund (2000) Transition Economies: An IMF Perspective on Progress and Prospects. Issue brief 00/08, International Monetary Fund.CrossRefGoogle Scholar
Ize, Alain and Levy-Yeyati, Eduardo (2003) Financial dollarization. Journal of International Economics 59, 323–347.CrossRefGoogle Scholar
Kaufmann, Daniel, Kraay, Aart, and Zoido-Lobatón, Pablo (1999) Governance Matters. World Bank policy research working paper 2196.Google Scholar
Kelley, Judith (2004) International actors on the domestic scene: Membership conditionality and socialization by international institutions. International Organization 58, 425–457.CrossRefGoogle Scholar
Kim, Chang-Jim and Charles, R. Nelson (1998) Business cycle turning points, a new coincident index, and tests of duration dependence based on a dynamic factor model with regime switching. Review of Economics and Statistics 80, 188–201.CrossRefGoogle Scholar
Kim, Chang-Jim and Charles, R. Nelson (1999) State-Space Models with Regime Switching. Cambridge, MA: MIT Press.Google Scholar
Kočenda, Evžen (2001) Macroeconomic convergence in transition economies. Journal of Comparative Economics 29, 1–23.CrossRefGoogle Scholar
Lane, Philip R. and Milesi-Ferretti, Gian Maria (2007) The external wealth of nations Mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics 73, 223–250.CrossRefGoogle Scholar
Lejour, Arjan M. and de Mooij, Ruud A. (2005) Turkish delight: Does Turkey's accession to the EU bring economic benefits? Kyklos 58, 87–120.CrossRefGoogle Scholar
Levy-Yeyati, Eduardo (2006) Financial dollarization: Evaluating the consequences. Economic Policy 21, 61–118.Google Scholar
Luca, Alina and Petrova, Iva (2008) What drives credit dollarization in transition economies? Journal of Banking and Finance 32, 858–869.CrossRefGoogle Scholar
Morley, James C., Nelson, Charles R., and Zivot, Eric W. (2003) Why are the Beveridge–Nelson and unobserved-components decompositions of GDP so different? Review of Economics and Statistics 85, 235–43.CrossRefGoogle Scholar
Neanidis, Kyriakos C. and Savva, Christos S. (2009) Financial dollarization: Short-run determinants in transition economies. Journal of Banking and Finance 33, 1860–1873.CrossRefGoogle Scholar
Neanidis, Kyriakos C. and Savva, Christos S. (2011) Nominal uncertainty and inflation: The role of European Union membership. Economics Letters 112, 26–30.CrossRefGoogle Scholar
Piazolo, Daniel (1999) The Credibility and Growth Effects of EU Institutions on Eastern Europe. European Investment Bank economic and financial report 99/P2.Google Scholar
Rennhack, Robert and Masahiro Nozaki (2006) Financial Dollarization in Latin America. IMF working paper 06/7.CrossRefGoogle Scholar
Rosenberg, Christoph B. and Tirpák, Marcel (2008) Determinants of Foreign Currency Borrowing in the New Member States of the EU. IMF Working Paper 08/173.CrossRefGoogle Scholar
Savva, Christos S., Neanidis, Kyriakos C., and Osborn, Denise R. (2009) Business cycle synchronization of the euro area with the new and negotiating member countries. International Journal of Finance and Economics 15, 288–306.CrossRefGoogle Scholar
Schweickert, Rainer, Melnykovska, Inna, Belke, Ansgar, and Bordon, Ingo (2011) Prospective NATO or EU membership and institutional change in transition countries. Economics of Transition 19, 667–692.CrossRefGoogle Scholar
Stock, James H. and Watson, Mark W. (1991) A probability model of the coincident economic indicators. In Lahiri, Kajal and Moore, Geoffrey H. (eds.), Leading Economic Indicators: New Approaches and Forecasting Records, pp. 63–89. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Stock, James H. and Watson, Mark W. (2011) Dynamic factor models. In Michael P. Clements and David F. Hendry (eds.), Oxford Handbook of Economic Forecasting, pp. 35–60. Oxford, UK: Oxford University Press.Google Scholar
Vieira, Fabrício A.C., Holland, Márcio, and Resende, Marco F. (2012) Financial dollarization and systemic risks: New empirical evidence. Journal of International Money and Finance 31, 1695–1714.CrossRefGoogle Scholar
World Bank (2002) Transition—The First Ten Years. Analysis and Lessons for Eastern Europe and the Former Soviet Union. Washington, DC: The International Bank for Reconstruction and Development.Google Scholar