Carry Trade vs. Deposit-Driven Euroization
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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. 2018/058
Subject:
Banking Currencies Currency mismatches Financial institutions Financial sector policy and analysis Financial statements Foreign exchange Loans Money Public financial management (PFM)
English
Publication Date:
March 15, 2018
ISBN/ISSN:
9781484345269/1018-5941
Stock No:
WPIEA2018058
Pages:
29
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