Carry Trade vs. Deposit-Driven Euroization

Author/Editor:

Nan Geng ; Tiberiu Scutaru ; Johannes Wiegand

Publication Date:

March 15, 2018

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 18/58

Subject:

English

Publication Date:

March 15, 2018

ISBN/ISSN:

9781484345269/1018-5941

Stock No:

WPIEA2018058

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

29

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