Deposit Dollarization as an Investment Signal in Transition Economies: The Cases of Croatia, the Czech Republic, and Slovakia

Posted: 31 Oct 2010

See all articles by Emre Ozsoz

Emre Ozsoz

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Dominick Salvatore

Fordham University - Department of Economics

Date Written: August 1, 2010

Abstract

In highly dollarized banking systems, the high level of foreign currency assets or liabilities on banks’ balance sheets may create a currency mismatch risk, which could lead to bank failures when faced with sudden exchange rate movements. Central banks in such economies have to adjust their currency policies accordingly. This paper uses probit and ordered probit models to forecast central banks’ direct interventions in the foreign currency markets as a result of exchange rate volatility using data from three transition economies with varying dollarization ratios. We show that, in these three economies, central banks’ interventions can be predicted to a degree by measuring dollarization as the ratio of dollar-deposits to M2 monetary base. Investors could potentially use this ratio as an investment signal.

Keywords: deposit dollarization, direct central bank intervention, foreign exchange rates, probit and ordered probit models

Suggested Citation

Ozsoz, Emre and Rengifo, Erick W. and Salvatore, Dominick, Deposit Dollarization as an Investment Signal in Transition Economies: The Cases of Croatia, the Czech Republic, and Slovakia (August 1, 2010). Emerging Markets Finance and Trade, Vol. 46, No. 4, 2010. Available at SSRN: https://ssrn.com/abstract=1699549

Emre Ozsoz (Contact Author)

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

Dealy Hall 5th Floor
441 East Fordham Rd
New York, NY 10458
United States

HOME PAGE: http://www.fordham.edu/academics/office_of_research/research_centers__in/cips/

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

United States
0017188174061 (Phone)
0017188173518 (Fax)

Dominick Salvatore

Fordham University - Department of Economics ( email )

Bronx, NY 10458
United States

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