engleski

Essays on unofficial euroization in European transition economies

The dissertation addresses unofficial euroization in European transition economies using the balance sheet effect framework. The balance sheet effect is a response to adverse exchange rate changes, i.e. exchange rate depreciation, and it manifests itself in higher debt servicing costs, driven by high levels of foreign currency denominated liabilities. Analysing the significance, size, and direction of the balance sheet effect, we explore the effects of unofficial euroization on three main sectors of the economy: banking, corporate, and sovereign sector. After the introduction given in Chapter 1, Chapter 2 of the dissertation investigates determinants of deposit euroization in the banking sector for 12 European post-transition economies using both linear and threshold models. Results suggest that exchange rates and interest rate differentials are important for explaining deposit euroization. Results for two countries with highest macroeconomic and institutional credibility and flexible exchange rate regimes, the Czech Republic and Poland, suggest no evidence of threshold effects, while for other countries threshold behavior was found. Threshold vector autoregression results indicate depreciations have a stronger effect on deposit euroization than appreciations, while interest rate spreads widen more after exchange rate depreciations than after appreciations. Moreover, we find evidence that deposit euroization changes more strongly after interest rate differentials increase than after they decrease. These results corroborate our expectations of deposit euroization nonlinear dynamics in the aftermath of exchange rate depreciation, and confirm that central banks carry out a certain “fear of floating” policy. Chapter 3 empirically tests the impact of exchange rate depreciations on sectoral performance proxied by investment or alternatively sales. It measures the balance sheet and the competitiveness effects in a country that records very high levels of liability euroization. Panel data methodology is applied on a dataset of 20 Croatian non-financial sectors combining macroeconomic and sectoral financial information. Results confirm there are strong negative liability euroization effects on both investment and sales. Negative balance sheet effects and very small positive competitiveness effects are found as well, adding up to a negative overall exchange rate depreciation effect on sectoral performance. Moreover, we find evidence that the corporate sector does not hedge against exchange rate exposure and that the domestic financial system is a constraining factor for corporate investment dynamics. We also find proof of size asymmetries related to bank lending relationships. In Chapter 4 we build an empirical model of sovereign spreads and its determinants, relying on recent theories of imperfect capital markets and balance sheet effects. We investigate nine European emerging economies that suffer from “original sin”, over the period 2001-2011, using dynamic panel error correction models proposed by Pesaran, Shin, and Smith (1999). This methodology improves estimation efficiency and model performance, but it also allows differentiation between long-run and short-run spread determinants. We find that in the long-run, sovereign spreads increase in response to a higher share of external debt in GDP, while they move in the opposite direction when the shares of current account and international reserves in GDP rise. In the short-run, sovereign spreads deviate from the long-run equilibrium, with half of the adjustment taking place in eight months. Our results suggest that in the short-run, higher external debt service caused by exchange rate depreciation, i.e. balance sheet effect, and market volatility tend to raise spreads, while higher tax revenues tend to decrease them. Moreover, we prove that the rise in sovereign spread is not due to external debt accumulation itself, but due to pure balance sheet effects.

balance sheet effect; euroization; exchange rate; “original sin”; sovereign spreads; transition Europe

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