Financial Dollarization and European Union Membership


Kyriakos C. Neanidis
Economics and Centre for Growth and Business Cycle Research
University of Manchester
Oxford Road
Manchester M13 9PL
United Kingdom


We analyse the effect of European Union (EU) membership on financial dollarization for the Central and Eastern European countries. Using a unique monthly data set that spans about two decades, we find that both the accession process towards EU membership and EU entry have a direct impact on deposit dollarization (DD) and loan dollarization (LD). EU membership reduces DD while it increases LD. The negative effect on DD captures the increased confidence of the private sector in the domestic currency, as they consider the EU admission process a reflection of their government's commitment to promoting policies of long-run currency stability. The positive impact on credit dollarization is the outcome of a greater convergence of exchange rates to the euro and the subsequent anticipation of lower currency risk, which diminishes the cost of foreign currency borrowing.