Financial Dollarization: Short-Run Determinants in Transition Economies

This paper examines the determinants of financial dollarization in transition economies from a short-run perspective. Using monthly data of deposit and loan dollarization we study the drivers of short-term fluctuations in dollarization and test their importance at different levels of dollarization. The results provide evidence that (a) the positive short-run effects of depreciation on deposit dollarization are exacerbated in high-dollarization countries; (b) short-run loan dollarization is mainly driven by banks matching of domestic loans and deposits, international financial integration, and institutional quality; and (c) both types of dollarization are affected by interest rate differentials and deviations from desired dollarization.