Carry Trade vs. Deposit-Driven Euroization

By Nan Geng, Tiberiu Scutaru, Johannes Wiegand

March 15, 2018

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Nan Geng, Tiberiu Scutaru, and Johannes Wiegand. Carry Trade vs. Deposit-Driven Euroization, (USA: International Monetary Fund, 2018) accessed December 22, 2024

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.

Subject: Banking, Currencies, Currency mismatches, Financial institutions, Financial sector policy and analysis, Financial statements, Foreign exchange, Loans, Money, Public financial management (PFM)

Keywords: Carry trade euroization, Central and Eastern Europe, Central Asia, Currencies, Currency mismatches, Emerging Europe, Euroization, Europe, Financial Dollarization, Financial statements, FX borrowing, FX loan, FX position, Global, Interest rate, Loan origination, Loans, Repayment scheme, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/058
Stock No:

WPIEA2018058
ISBN:

9781484345269
ISSN:

1018-5941

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