Financial liberalization and the financial euroization

Abstract

The issue of financial liberalization is one of the most exploited topics in the late transitioning countries’ financial crises discussions. One thing the literature is seeking is what the role of the limited capital movements is. Particulary, does it send a signal to the possible investors that the country has something to hide that in terms of future macroeconomic policies will lead to financial crisis. Along with the debate of financial liberalization, the question on financial eurozation is also one important issue regarding emerging or transitioning economies. The debate on euroization is more concentrated on the determinants that in the end conclude that one very important incentive for investors to invest in instruments with foreign currency clause is the monetary credibility. The distrust of the ability for one country to maintain the inflation rate and exchange rate at a stable level merges these two issues (financial liberzlaition and euroization) in one. The first part of the paper presents two models, discussing the factors that affect domestic agents to invest abroad. The second part elaborates those factors on the case of Macedonia. Throughout the signals the deposit euroization is sending the macroeconomic policies which the paper is concluding that if the models are correct than there is no place for fear of large scale capital outflows in case of financial liberalization.