Graduate Institute of International and Development Studies Working Paper 07/2015
This paper examines the phenomenon of financial euroization in Albania, focusing on the liability side of the banking system. It explores some of the main theoretical and empirical determinants of deposit euroization in the context of the high euroization rates originating in the transition period of the early 1990s. Despite gradual improvements in the macroeconomic framework, euroization rates have continued to be persistent throughout, long after the reversal of the original triggers of such phenomenon. The high level of euroization entails policy relevant concerns for euroized economies, as it has been shown to have potential adverse effects on macroeconomic policies and financial stability, issues of vital importance for a central bank. Using a VAR framework to capture the simultaneous dynamic relationships between macroeconomic aggregates, this paper finds evidence that euroization rates are highly persistent in Albania, while being influenced by several factors such as interest rate differentials, exchange rates, and credit euroization.