Academic journal article Research in Applied Economics

Effects of Unofficial Euroisation in Serbia with Regards to the Inflation and Real GDP

Academic journal article Research in Applied Economics

Effects of Unofficial Euroisation in Serbia with Regards to the Inflation and Real GDP

Article excerpt


The term euroisation or dollarization involves several different monetary systems that are very different from one another, but have a common feature of having a foreign currency widespread as a means of payment in the formal or informal transactions. Therefore, Serbia has the highest index of unofficial euroisation in the region of South Eastern Europe. The aforementioned index demonstrates clearly the high level of informal euroisation in Serbia in the balance sheets of commercial banks. The share of dinar (RSD) corporate loans in Serbia is modest, having 77% of the total loans to corporations in Serbia being either euro-indexed or credited directly in euros. During the financial crisis in 2008 and 2009 euroisation was not reduced, but quite the contrary, it was increased and has begun gaining momentum. Despite favourable conditions for dinar loans in terms of lower inflation rate, lower interest rates on dinar loans in such conditions, but also due to the reduction of RRs required (mandatory) reserves to dinar share of commercial banks' balance sheet, the share of loans in dinars is not increased, but, on the contrary, the loan activity of commercial banks in Serbia is reduced. The current level of informal euroisation in Serbia represents a serious challenge in terms of active monetary policy, due to controlled exchange rate, lack of local funding, high foreign exchange risk and lack of hedging instruments in terms of foreign exchange risk mitigation, which are the limiting factors of an active monetary policy.

JEL: E, E4, E42, E43

Keywords: euroisation or dollarisation, unofficial euroisation

1. Recent Cases of Dollarisation and Euroisation

The international monetary system has achieved great success in 1971 when the Bretton Woods system had reached its collapse. Since then, it has been generally accepted that the development of those countries whose economies are open to international capital flows shall choose between: (1) a flexible, market-formed exchange rate; and, what is known as a (2) forced binding to the currency (cash) system of another country (hard pegs) (José Luis Cordeiro, 2002). In the system of forced binding (hard pegs), the central bank implemented institutional mechanisms by which it ensures its ability to replace the foreign currency using the national currency, which then represents forced binding - hard pegs. Thus, the currency of one country is simply replaced by another currency, as a rule, it is the currency that makes the international foreign exchange reserves. Under the conditions of such forced binding, the risks of speculative attacks are less than in the case of fixed exchange rate. According to Stanley Fischer "forced binding is not sustainable, but they represent very stable systems." Only two exchange rate regimes can be analyzed in a forced binding system (hard pegs): (1) currency board, and (2) dollarisation, or euroisation. In the Monetary Board systems, the Central Bank enables storing a sufficient amount of foreign currency in the assets section of its balance sheet. Therefore, the Central Bank has a significant amount of foreign exchange reserves compared to the amount of local currency with regards to the liabilities of the Central Bank balance sheet at a fixed rate. Unlike the monetary board, a country formally adopts the currency of another country by dollarisation or euroisation. Therefore, the currency of another country becomes a legal payment method to perform a variety of transactions.

This means that some countries have given up independent monetary policy and adopted the currency of another country in order to perform all transactions (Ellen, Nikolas and Massimiliano, 2002). Although the binding to the monetary system of the other country is known as dollarisation, the process is not always based on the U.S. dollar, but also on the European euro, in which case it is renamed to euroisation. Therefore, the adoption of a country's currency by another country has its own place in the history of the world economy, but has not been used for some time. …

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