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The determinants of deposit euroization in European post-transition countries: evidence from threshold VECM

This paper investigates monetary determinants of deposit euroization (DE) in European post-transition economies using both linear and threshold models. Results suggest that exchange rates and differences between domestic and euro interest rates are important for explaining DE. Results for two countries with highest macroeconomic and institutional credibility and flexible exchange rate regimes, i.e. Czech Republic and Poland show no sign of nonlinearities, while for other countries we found evidence of nonlinear behavior. Countries with fixed exchange rate regimes seem to react to DE changes with a lag and countries that do not have an exact commitment to neither a fixed nor a fully flexible regime show greater sensitivity and vulnerability to exchange rate changes. Threshold VAR results indicate that depreciations have a stronger effect on DE than appreciations and that interest rate spreads widen by a greater amount after exchange rate depreciations than after appreciations. Moreover, we found evidence that DE rises more strongly after interest rate differentials increase than when they decrease. We differentiate two types of deeuroization policy recommendations: achieving convergence criteria for countries with fixed exchange rates and for different types of managed floaters we suggest increasing macroeconomic and institution credibility in combination with regulatory measures and financial market development.

deposit euroization; transition; threshold; nonlinear

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