Determinants of Deposit and Credit Euroization in Eastern Europe: A Bayesian Model Averaging Evidence 1

The paper investigates the motives for deposit and credit euroization in Eastern Europe employing Bayesian empirical methodology. We analyse an extensive dataset of macroeconomic fundamentals, perception surveys and institutional quality indicators, and deal with the uncertainty in the model by Bayesian model averaging. Apart from traditional fundamental macroeconomic factors, strong institutions are found to be an important driver of both credit and deposit euroization. Business regulation, perception of corruption, quality of political arrangement and trade restrictions impact borrowing and saving behaviour in the euro and should be reflected in designing economic policies in the region.