Monetary Policy Transmission in Euroized Countries: Evidence from Emerging Europe

This paper studies domestic monetary policy transmission in European countries with a significant share of lending and deposits in foreign currency, referred to as ‘euroized economies’. We find that the impact of domestic monetary policy shocks on both inflation and GDP diminishes with the degree of euroization across countries: the effects are twice as high in non-euroized countries compared to countries in our sample with the highest level of euroization. We further examine the exchange rate, credit and interest rate transmission channels, which are typically less effective in euroized economies. We show that domestic monetary policy has at best limited effects on the exchange rate. In addition, during the post-pandemic monetary tightening episodes, an increase in foreign-currency loans often softened the decline in overall credit growth, and rates of foreign-currency loans have followed the ECB policy rate rather than the domestic ones. By contrast, our analysis suggests that the pass-through to interest rates of domestic currency loans is similar across countries with different levels of euroization.