New Economics Papers
on Financial Markets
Issue of 2005‒07‒25
sixty-five papers chosen by

  1. Monetary transmission mechanism in Estonia - empirical model By Rasmus Pikkani
  2. The importance of the bank-lending channel in Estonia: evidence from micro-economic data By Reimo Juks
  3. Finance and Growth: A Critical Survey By Alex W. Trew
  4. Evaluación del desempeño de las instituciones aseguradoras (EPS y ARS) en términos de su contribución al logro de uno de los fundamentos de By María Cristina PEÑALOZA RAMOS.
  5. Banks without Parachutes – Competitive Effects of Government Bail-out Policies By Hendrik Hakenes; Isabel Schnabel
  7. A theory of low inflation in a non Ricardian economy with credit Constraints. By Xavier Ragot
  8. Costo de Uso del capital en Colombia: 1997-2003. By Leonardo RHENALS ROJAS
  9. Price Volatility and Banking in Green Certificate Markets By Eirik S. Amundsen; Fridrik M. Baldursson; Jørgen Birk Mortensen
  10. Does the market pick up on the total value added to the peruvian companies by a devaluation of ... By EVA RAQUEL PORRAS
  11. Market segmentation and the relative cost of trading american depository receipts By GONZALO CHAVEZ; ANA CRISTINA SILVA
  12. Fast Computation of the Economic Capital, the Value at Risk and the Greeks of a Loan Portfolio in the Gaussian Factor Model By Pavel Okunev
  13. The Fallacy of ´Only the Strong Survive´: The Effects of Extrinsic (...) By JULIO DE CASTRO
  14. Lending cycles in Estonia By Märten Kress
  15. Trading Costs for Emerging Market Stocks By GONZALO CHAVEZ; ANA CRISTINA SILVA
  16. Determinants of Estonian Sovereign Credit Rating By Andres Vesilind; Ingrid Toming; Raoul Lättemäe
  17. Bank Size and Risk-Taking under Basel II By Hendrik Hakenes; Isabel Schnabel
  18. Monetary transmission mechanism in Estonia - some theorethical considerations and stylized aspects By Raoul Lättemäe
  19. Causes, consequences, and cures of myopic loss aversion - An experimental investigation By Gerlinde Fellner; Matthias Sutter
  20. Biased selection within the social health insurance market in Colombia By Ramón Castaño; Andrés Zambrano
  21. Implementing and improving the SEI risk management method in a university software project By JOSE MANUEL ESTEVES
  22. The relationship between REER and trade flows in the context of the equilibrium exchange rate By Reimo Juks
  23. Accession to EMU and exchange rate policies in Central Europe - decision under institutional constraints By Andreas Freytag
  24. Determinants of corporate anti-takeover provisions By JUAN SANTALO
  25. Nominal and real convergence in Estonia: the Balassa-Samuelson (Dis)connection By Balàzs Ègert
  26. Application of investment models in foreign exchange reserve management in Eesti Pank By Andres Vesilind; Toivo Kuus
  27. Crisis cambiarias en Colombia bajo tipo de cambio Fijo: 1938-1967. By Fabio Sánchez; Andrés Fernández; Armando Armenta.
  28. Elimination of the Foreign Property Rule on Tax Deferred Savings Plans By Joel Fried
  29. ¿Se ha liberalizado el comercio de servicios en los acuerdos comerciales de EEUU? El caso de NAFTA y los TLC con Chile y Singapur. By Alejandra RANGEL; Catalina DELGADO; Jorge CEPEDA; Germán MUÑOZ
  30. The impact of Scandinavian economies on Estonia via foreign trade and direct investments By Laura Ehrlich; Ülo Kaasik; Anu Randveer
  31. Política monetaria y la corte constitucional: el caso del Salario mínimo. By Marc Hofstetter
  32. Market Definition As a Social Construction (Marktabgrenzung als soziale Konstruktion) By Christoph Engel
  33. Fundamentals versus contagion proxies to explain financial assets price changes By EVA RAQUEL PORRAS
  34. Estimating the equilibrium exchange rate of the Estonian kroon By Marit Hinnosaar; Hannes Kaadu; Lenno Uusküla
  35. A test of cointegration between security markets of latin american nations (...) By EVA RAQUEL PORRAS
  36. Policy-Induced Mean Reversion in the Real Interest Rate? By Zisimos Koustas; Jean-Francois Lamarche
  37. El modelo DNPensión V 4.0 Parte I. By Javier Hernando OSORIO GONZALEZ; Juliana MARTINEZ CUELLAR; Tomás RODRÍGUEZ BARRAQUER.
  38. Choice of Monetary and Exchange Regimes in ECOWAS: An Optimum Currency Area Analysis By Chantal Dupasquier; Patrick N. Osakwe; Shandre M. Thangavelu
  39. Are Europe's Interest Rates led by FED Announcements? By Andrea Monticini; Giacomo Vaciago
  40. Learning, Institutions, and Economic Performance By Chrysostomos Mantzavinos; Douglas C. North; Syed Shariq
  42. Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker By Alvaro Aguiar; Manuel M. F. Martins
  43. Does external trade promote financial development? By Yongfu Huang; Jonathan Temple
  44. Sustainability of the Slovenian Pension System: An Analysis with an Overlapping-generations General Equilibrium Model By Miroslav Verbic; Boris Majcen; Renger van Nieuwkoop
  45. Historia monetaria de Colombia en el siglo XX: grandes tendencias y episodios relevantes. By Fabio Sánchez; Andrés Fernández; Armando Armenta
  46. The Reform of Local Taxation in the United Kingdom in the Light of The Balance of Funding Review Report. By Fender, John.
  47. Potential output estimates for Central and East European countries using production function method By Marit Hinnosaar
  49. The problem of variable selection for financial distress: applying GRASP methaeuristics By LAURA MARTA NUÑEZ
  50. Canales de transmisión monetaria: una revisión para Colombia By Alexander Correa Ospina
  51. Building a Better Fund of Hedge Funds: A Fractal and Alpha - Stable Distribution Approach By Yan Olszewski
  52. No euro please, We’re British! By Lucio Valerio Spagnolo, Mario Cerrato
  53. The monetary sector under a currency board arrangement : specification and estimation of a model with Estonian data By Rasmus Pikkani
  54. Do Moving Average Rules Make Profits? A Study Using The Madrid Stock Market By LAURA MARTA NUÑEZ
  55. Banks, Markets, and Efficiency By Falko Fecht; Antoine Martin
  56. Relative Market Share, Leadership and Competition in Concentrated Banking Markets. By Arie Melnik; Oz Shy; Rune Stenbacka
  57. Ambiguity in Financial Markets: Herding and Contrarian Behaviour By Ford, James L; Kelsey, D; Pang, W
  59. Testing the efficiency of emerging markets: the case of the Baltic States By Virmantas Kvedaras; Olivier Basdevant
  60. Integrated monetary and exchange rate frameworks: are there empirical differences? By Lucio Vinhas de Souza
  61. Una aproximación al financiamiento de un sistema de protección social en Colombia By Olga Lucía Acosta; Luis Fernando Gamboa Niño
  62. Equilibrium exchange rate of the Estonian kroon, its dynamics and impacts of deviations By Fabio Filipozzi
  63. Valoración de Empresas Tecnológicas mediante Opciones Reales By CONCEPCION MARTIN
  64. Assessment of the Euro\'s implications for European economic development By Iika Korhonen; Mare Randveer
  65. Nonlinear Incentive Provision in Walrasian Markets: A Cournot Convergence Approach By Martin Hellwig

  1. By: Rasmus Pikkani
    Abstract: Estonia has conducted effectively monetary policy according to currency board arrangement for nine years already. For this Estonia has traded off its freedom in active monetary policy operations for nominal anchoring economy through exchange rate. In this context Estonian own monetary policy actions could hardly make any difference and Estonian monetary conditions are heavily relying on decisions made by the issuer of anchor currency. At the same time, there are number of factors having influence on the degree of dependence on foreign monetary factors, most important of which is the openness of the economy to all balance of payments flows and the strength of the domestic banking sector. A mix of all possible factors and decision-making rules in the economy specifies directly the speed and the strength of transmission of foreign monetary signal into domestic economy. The aim of the current paper is to study transmission of ECB monetary policy decisions into Estonian economy. Additionally, absorption of unanticipated foreign and domestic monetary shocks are analysed. For this, rather small macroeconometric model with 11 behavioural equations is specified and estimated. Special emphasis is given on the formation of domestic interest rates and on the intermediation of domestic and foreign funds by domestic banking sector over shock periods. As a result, it is found that the transmission of ECB monetary policy actions over European inter-bank money market into Estonian economy is relatively fast. This is probably mostly due to high openness of the economy and to high price and wage flexibility in Estonia.
  2. By: Reimo Juks
    Abstract: The paper studies the importance of the bank-lending channel in Estonia. The results from the descriptive evidence suggest that there is a significant share of bank dependent borrowers in Estonia, but the impact of a monetary policy shock on the loan supply of banks seems to be ambiguous. The empirical analysis provides evidence in favour of the bank-lending channel in Estonia. First, well-capitalized banks seem to experience a smaller outflow of deposits after a monetary contraction. Second, the liquidity position of banks seems to be an important determinant of the loan supply suggesting that more liquid banks are able to maintain their loan portfolios, while less liquid banks must reduce their loan supply after a monetary policy contraction. This finding is consistent with the evidence for the euro area, where liquidity is also the most important determinant of the loan supply.
    Keywords: bank lending channel; monetary policy transmission
    JEL: E52 G21 G32 C33
  3. By: Alex W. Trew
    Abstract: This paper surveys the literature on the relationship between finance and growth from a longitudinal, and primarily theoretical, perspective. Important qualifications to the empirical consensus are noted and we consider the prevalence of cross-section econometrics as dominant in shaping the present theoretical consensus. We develop a general model capable of capturing a number of key conclusions from theoretical research. We then trace out the numerical implications of this class of models for time-series growth, as well as outlining ways in which these models might be tested quantitatively for historical congruence. We suggest a reason for the preponderance of theoretical considerations of financial efficiency despite empirical analysis of financial deepness, and how this makes direct comparisons between the theory and empirics of finance and growth difficult. The core implications of many finance and growth theories are shown to be incongruent with the historical record.
    Keywords: finance and growth, endogenous growth, economic history.
    JEL: O11 O16 O40 N23
    Date: 2005–07
  4. By: María Cristina PEÑALOZA RAMOS.
    Abstract: El presente documento tiene como objetivo realizar una evaluación del desempeño de las instituciones aseguradoras (EPS y ARS) en términos de su contribución al logro de uno de los fundamentos de la Ley 100 de 1993, el cual es la equidad en la prestación de servicios de salud del SGSSS. Este aspecto de equidad / inequidad del Sistema será observada desde el punto de vista del acceso y utilización de servicios de salud por parte de la población.
    Keywords: EPS
    Date: 2005–05–13
  5. By: Hendrik Hakenes (Max Planck Institute for Research on Collective Goods, Bonn, Germany); Isabel Schnabel (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the protected bank to expand, thereby intensifying competition in the deposit market and depressing other banks’ margins. In contrast, the effects on the protected bank’s risk-taking and on welfare depend on the transparency of the banking sector.
    Keywords: Government bail-out, banking competition, transparency, “too big to fail”, financial stability
    JEL: G21 G28 L11
    Date: 2004–11
  6. By: Fernando Rubio (FERNCAPITAL S.A.)
    Abstract: This paper explain, analyze and apply in an example the original paper developed by Kopprasch, Boyce, Koenigsberg, Tatevossian, and Yampol (1987) from The Salomon Brothers Inc. Bond Portfolio Analysis Group. Please, be aware. This paper is for educational issues only. There is a Spanish version in EconWPA.
    Keywords: Salomon Brothers, bond portfolio, duration and convexity, effective duration, valuation, callable and non callable bond
    JEL: G10 G15 G21 G32
    Date: 2005–07–20
  7. By: Xavier Ragot
    Abstract: This paper explores the relationship between the severity of credit constraints and long run inflation in a simple non Ricardian setting. It is shown that a low positive inflation can loosen credit constraints and that this effect yields a theory of the optimal long run inflation target with no assumption concerning nominal rigidities or expectation errors. Credit constraints introduce an un-priced negative effect of the real interest rate on investment. Because of this effect, the standard characterization of economic efficiency with the Golden Rule fails to apply. When fiscal policy is optimally designed, the first best allocation can be achieved thanks to a positive inflation rate and a proportional tax on consumption.
    Date: 2005
  8. By: Leonardo RHENALS ROJAS
    Abstract: El documento analiza la evolución del costo de uso del capital en el periodo 1997 – 2003 en Colombia. A diferencia de los trabajos anteriores se construye una serie del costo de uso del capital a partir de la información suministrada por las empresas a la Superintendencia de Sociedades, lo cual evita los errores generados por la utilización de variables macroeconómicas agregadas. Durante los últimos siete años las tasas de interés y la inflación se han reducido drásticamente luego de la crisis de finales de los noventa, lo cual ha repercutido sobre el costo de uso del capital en Colombia. Por otra parte, las tasas impositivas han permanecido relativamente constantes, a pesar de las numerosas reformas tributarias las cuales han estado más orientadas a aumentar la base gravable. Estos dos factores afectan las decisiones de inversión y financiamiento por parte de las empresas lo cual se ve reflejado en el crecimiento económico de mediano y largo plazo. Durante el periodo de estudio el costo de uso se ha reducido en poco más de un tercio desde su nivel en 1997, sin embargo en términos reales sigue siendo alto. Medidas adoptadas recientemente para estimular la inversión vía descuento de inversiones en activos productivos tendrían un impacto limitado sobre el costo de uso del capital con respecto a medidas de política monetaria tendientes a reducir las tasas de interés y la inflación.
    Keywords: Inversión
    Date: 2005–01–13
  9. By: Eirik S. Amundsen (Department of Economics, University of Bergen); Fridrik M. Baldursson (Department of Economics, University of Iceland); Jørgen Birk Mortensen (Institute of Economics, University of Copenhagen)
    Abstract: There is concern that prices in a market for Green Certificates (GCs) primarily based on volatile wind power will fluctuate excessively, leading to corresponding volatility of electricity prices. Applying a rational expectations simulation model of competitive storage and speculation of GCs the paper shows that the introduction of banking of GCs may reduce price volatility considerably and lead to increased social surplus. Banking lowers average prices and is therefore not necessarily to the benefit of “green producers”. Proposed price bounds on GC-prices will reduce the importance of banking and even of the GC system itself.
    Keywords: electricity; environment; commodity speculation; green certificates; marketable permits; uncertainty
    JEL: Q28 Q42 Q48
    Date: 2005–07
  10. By: EVA RAQUEL PORRAS (Instituto de Empresa)
    Abstract: The main goal of this paper is to test a form of market efficiency in the Lima Stock Exchange. This study examines how the individual stock prices of two selected companies are affected by three standard deviation changes in the exchange rate between the Peruvian Nuevo Sol and the US dollar. The main question that drives this paper is whether the market picks up on the total value added to these Peruvian companies by a devaluation of the Peruvian Nuevo Sol. The findings of this study suggest that, in reference to the companies studied, the Peruvian, stock market does not impound instantly the impact that a change on the exchange rate has in the value of these corporations.
    Keywords: Currency markets, Event study, Exchange rate, Market Efficiency
    Date: 2004–12
  11. By: GONZALO CHAVEZ (Instituto de Empresa); ANA CRISTINA SILVA (Instituto de Empresa)
    Abstract: (WP 06/04 Clave pdf) We compare trading costs between local stocks and their corresponding NYSE ADRs for Argentina, Brazil, Chile and Mexico.Results show that local stocks trading in Mexico and Chile exhibit higher costs than their ADRS,while Brazilian local stocks cost less. Argentina presents no significant differences. When we control for stock characteristics, the previous difference disappears for Brazilian and Chilean securities,while it is accentuated for Mexico. Local Mexican stocks are almost 3% of value traded more costly than their corresponding ADRs.Thus,Mexico presents cost barriers that inhibit the implementation of arbitrage transactions that facilitate stock price alignment.
    Date: 2004–03
  12. By: Pavel Okunev (Lawrence Berkeley National Laboratory)
    Abstract: We propose a fast algorithm for computing the economic capital, Value at Risk and Greeks in the Gaussian factor model. The algorithm proposed here is much faster than brute force Monte Carlo simulations or Fourier transform based methods. While the algorithm of Hull-White is comparably fast, it assumes that all the loans in the portfolio have equal notionals and recovery rates. This is a very restrictive assumption which is unrealistic for many portfolios encountered in practice. Our algorithm makes no assumptions about the homogeneity of the portfolio. Additionally, it is easier to implement than the algorithm of Hull- White. We use the implicit function theorem to derive analytic expressions for the Greeks
    Keywords: Economic capital, gaussian factor model, value at risk, unexpected loss, fast algorithm
    Date: 2005–07–23
  13. By: JULIO DE CASTRO (Instituto de Empresa)
    Abstract: (WP 07/04 Clave pdf) According to economic theory, under-performing firms should be selected out of the market. However, research shows that these firms persist, often for long periods of time. In this article we explore the non-firm-performance factors that contribute to the decision to persist with an under-performing firm. Using the escalation of commitment literature we identify seven variables that are associated with the persistence decision. We reconcile the economic and psychological views by finding that the extent to which some of these non-firm-performance factors influence the persistence decision is, in part, dependent upon the owner-managers’ level of extrinsic motivation.
    Date: 2004–03
  14. By: Märten Kress
    Abstract: The objective of this paper is to examine possible cyclical patterns in the lending behavior of Estonian commercial banks. Furthermore, the degree of cycle synchronization between the business cycle and the credit cycle and how much one cycle is behind the other in the case of Estonia is of particular interest. The paper uses data from between January 1994 and February 2004 to identify the Estonian business and credit cycles and compare their features. A Markov regime-switching technique was used in dating both business and credit cycles. Variables of interest in terms of the credit cycle include the total amount of loans provided by commercial banks, household loans, corporate loans, and the share of overdue loans in the total portfolio. Both, monthly and quarterly data was utilized to double-check the results and the business cycle was dated using the Industrial Production Index (IPI) and GDP, respectively. The share of overdue loans in the total portfolio appeared to be counter-cyclical as expected. Changes in the IPI seemed to cause changes in corporate loans with a two-quarter lag on average. Asymmetries between the credit and business cycles were found for Estonia. That is, it takes approximately five months from the beginning of an economic slowdown before corporate loans move into a contraction regime. However, it takes approximately eight months for corporate loans to recover their expansionary growth rate. Changes in household loans seemed to precede changes in economic activity by approximately one quarter.
  15. By: GONZALO CHAVEZ (Instituto de Empresa); ANA CRISTINA SILVA (Instituto de Empresa)
    Abstract: We estimate trading costs that include explicit, implicit and opportunity costs. The Lesmond et al. (1999) limited dependent variable model of returns is applied to stocks in Argentina, Brazil, Chile and Mexico. Costs are compared across countries for samples matched by market value. Comparisons are performed while controlling for variations in the economic variables that affect trading costs using regression models [Bessembinder & Kaufman (1997)]. We find that trading costs for large and medium firms are significantly higher for Brazil and Mexico than for Argentina and Chile. This result is interesting given that the two former markets are, by far, the most active markets in Latin America.
    Keywords: Emerging markets, Market microstructure, Stock markets, Trading costs
    Date: 2004–02
  16. By: Andres Vesilind; Ingrid Toming; Raoul Lättemäe
    Abstract: The paper focuses on sovereign credit ratings assigned to Estonia and analyses their possible determinants. The first chapter gives an overview of different rating agencies and the methodology they use in rating process. Besides that the interpretation, comparability and explanatory power of different ratings are analysed. The chapter concludes with the description of Estonian rating history. The second chapter analyses the possible determinants of Estonian rating. Firstly, the possible problems in analysing the determinants are discussed. Secondly, the factors that have been seen as important determinants of ratings in theoretical literature or previous empirical researches are presented. The third chapter analyses empirically the determinants of Estonian credit rating. For this purpose, Estonia is analysed in the context of three country groups: former socialist countries, developed European countries and countries having similar ratings. Also the factors that different rating agencies have pointed out in their reports about Estonia are compared with the empirical results. The chapter concludes with the comparison of the results of the analysis and SWOT analysis. The results of the paper show that the most critical factors for Estonia that can constrain possible rating upgrade in the future are low nominal level of per capita GDP, high unemployment rate and high CA deficit. At the same time it should be looked after that other important indicators that have a strong relation with rating (such as inflation, fiscal balance, foreign debt level and speed of transition and EU accession) are kept under control.
  17. By: Hendrik Hakenes (Max Planck Institute for Research on Collective Goods, Bonn, Germany); Isabel Schnabel (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: This paper discusses the relationship between bank size and risk-taking under Pillar I of the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we find that small banks (and hence small borrowers) may profit from the introduction of an internal ratings based (IRB) approach if this approach is applied uniformly across banks. However, the banks’ right to choose between the standardized and the IRB approaches unambiguously hurts small banks, and pushes them towards higher risk-taking due to fiercer competition. This may even lead to higher aggregate risk in the economy.
    Keywords: Basel II, IRB approach, bank competition, capital requirements, SME financing
    JEL: G21 G28 L11
    Date: 2005–03
  18. By: Raoul Lättemäe
    Abstract: The monetary system in Estonia is based on the currency board arrangement. The strong commitments and rule-based features of currency board imply that there is no active monetary policy in Estonia - all necessarily monetary adjustments are left to the market forces. Under fixed exchange rate and free capital mobility Estonian monetary conditions are therefore closely linked with monetary policy in Europe - in addition to the changes in Estonian risk-premium, interest rate developments in Europe can directly influence Estonian interest rates. Those monetary signals transmit widely into Estonian financial sector and ultimately into Estonian real sector through various channels. Some theoretical and intuitive aspects that can affect this process in Estonia have gained special attention in this paper.
  19. By: Gerlinde Fellner; Matthias Sutter
    Abstract: Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, /if/ subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility.
    Keywords: loss aversion, risk, investment, experiment
    JEL: C91 D80 G11
    Date: 2005–07
  20. By: Ramón Castaño; Andrés Zambrano
    Abstract: Reducing the impact of insurance market failures with regulations such as community-rated premiums, standardized benefit packages and open enrolment, yield limited impact because they create room for selection bias. The Colombian social health insurance system started a market approach in 1993 on the expectation to improve performance of preexisting monopolistic insurance funds by exposing them to competition by new entrants. It is hypothesized that market failures would lead to biased selection favoring new entrants. Two household surveys are analyzed using Self-reported health status and the presence of chronic conditions as indicators of prospective risk of enrolees. Biased selection is found to take place, leading to adverse selection among incumbents, and favorable selection among new entrants. This pattern is observed in 1997 and worsens in 2003. Although the two incumbents analyzed are public organizations, and their size dropped substantially between these two years, fiscal implications in terms of government bailouts are analyzed.
    Keywords: Social Health Insurance
    JEL: I11
    Date: 2005–05–01
  21. By: JOSE MANUEL ESTEVES (Instituto de Empresa)
    Abstract: Although risk management approaches appeared more than one decade ago, there is the evidence of low penetration rate of their techniques in software projects. One of the most known methods is the SEI Software Continuous Risk Management (SEI-CRM) method. This paper addresses the usage of the SEI-CRM method in a big software development project. The study we carried out suggests that SEI-CRM is limited in terms of the organizational risk perspective. This research is expected to contribute with the knowledge on risk management for software development projects by for which we propose to extend the SEI-CRM method with some organizational risk factors that we have found relevant from our study.
    Keywords: Risk, Risk management, SEI-CRM , Organizational risks
    Date: 2004–10
  22. By: Reimo Juks
    Abstract: The paper focuses on the time-series analysis of the traditional trade equations. The results from the cointegration, ARDL and Granger causality analyses of trade elasticities cast some doubt on the usefulness of the internal-external balance approach to the equilibrium exchange rate. The long-run impact of the REER on trade flows turned out to be statistically insignificant, being independent of method and specification of the model employed. The latter implies a secondary role for the REER in achieving a sustainable position of external balance.
    Date: 2003–11–20
  23. By: Andreas Freytag
    Abstract: Currently, five Central and Eastern European (CEE) countries are negotiating about the membership in the European Union: Czech Republic, Estonia, Hungary, Poland and Slovak Republic. There is a broad consensus that they will eventually become members of the European Monetary Union. This requires careful analysis of the appropriate exchange rate regime prior to the accession. The exchange rate arrangement of the EU applicants plays an important - but not exclusive - role in their policy-mix. The history of transition economies as well as of other emerging markets illustrates that exchange rate policies as such are not a distinctive factor for the success and failure of monetary policy with respect to price stability. In this paper it is argued that this outcome has not emerged by chance. There is no naturally superior exchange rate regime that can be applied to all advanced countries in transition aiming at stability. By way of contrast, an exchange rate arrangement is part of the monetary regime, which itself is a component of the economic order. The latter consists of both politically chosen and spontaneously evolved institutions. This leads to the hypothesis that the choice of an exchange rate arrangement in CEE is constrained by this institutional setting. The theoretical considerations as well as empirical evidence indeed suggest that for guaranteeing stability, beside the legal monetary commitment (part of which being the exchange rate regime) the institutional framework in the country is decisive. If the latter matches the commitment, the credibility of a monetary regime is relatively high, obviously encouraging monetary stability. Therefore, the institutional setting in each country should be analysed extensively before an exchange rate arrangement is chosen.
  24. By: JUAN SANTALO (Instituto de Empresa)
    Abstract: In this paper I study empirically the industry and firm characteristics that determine the level of corporate antitakeover protection. I find that the level of antitakeover protection is negatively associated with the level of firm-specific organizational capital and with stock market volatility. On the other hand, firms that allow a larger degree of antitakeover protection to their managers do indeed invest more in long term projects and operate in more concentrated industries. All these findings are consistent with a managerial entrenchment interpretation of corporate antitakeover provisions.
    Keywords: Takeover defenses, Organizational capital, Product market competition, Managerial compensation
    Date: 2004–10
  25. By: Balàzs Ègert
    Abstract: The objective of the paper is to analyse the nominal and real convergence process in Estonia drawing on the Balassa-Samuelson (B-S) framework. A 15-sectoral breakdown for GDP and a 5-digit level CPI data disaggregation with over 260 items is used for the period 1993:Q1 to 2002:Q1 to show that the productivity differential is related to the GDP-deflator relative price of non-tradable goods in the long run. Furthermore, the role of regulated prices in the CPI basket is also investigated - we show that excluding regulated prices makes it possible to detect a robust relationship between productivity and the relative price of market services in CPI. The B-S effect could have possibly contributed to CPI by a yearly average of 2-3% over the sample period, and more specifically 1-4% at the beginning of the period and 0.5-1% in 2000 and 2001. The potential long-run impact of the B-S effect in Estonia is estimated to amount to 1-2%. Analysis of the influence of the B-S effect on the inflation differential and the real appreciation of the exchange rate against Finland, Sweden, Germany and the UK, shows that, whereas the inflation differential attributable to the B-S effect seems to have been higher in the early 1990s, it better explains the real appreciation occurring in recent years.
    Keywords: convergence, transition, Balassa-Samuelson effect, productivity, relative prices, tradable goods, regulated prices, real exchange rate
  26. By: Andres Vesilind; Toivo Kuus
    Abstract: This paper describes active investment strategy used in the central bank of Estonia and introduces model-based investment decisions as a component of that strategy. The first chapter of the paper describes the evolution of the investment process in Eesti Pank and outlines the framework of reserve management. It describes the role of several forms and styles of investing: active and passive management, qualitative and quantitative management, emphasizing the role of diversification for achieving better performance. The chapter concludes with the description of the investment strategy used in the central bank of Estonia. The second chapter describes model-based investing as part of active management strategy. Three investment models are estimated and tested: a model for directional positions in the US, German and Japanese 10-year government bond futures, a model for cross-currency positions in ten major currencies, and a model for cross-country yield spread trades in eight major government bond markets. The models extend the framework developed by Ilmanen and Sayood (Ilmanen et al. 2002). After the model estimation the models are combined with a trend-following model and the whole set of diversified models is tested. Finally, correlation study of these results with the results of external asset managers and in-bank discretionary analysis is performed. The paper ends with a discussion on the possibilities for further development of the quantitative investment program and conclusions.
    Keywords: trading rules, active management, central bank reserves
    JEL: E44 E47 E58 G11 G15
  27. By: Fabio Sánchez; Andrés Fernández; Armando Armenta.
    Abstract: Entre 1938 y 1967, lo cual incluye el período de Bretton Woods después de la Segunda Guerra Mundial, Colombia fijó su tipo de cambio al dólar. A pesar de que el régimen cambiario operó bajo el esquema de fijación del tipo de cambio, el peso fue devaluado oficialmente en más de 12% en seis ocasiones. Los episodios de devaluación fueron complejos, traumáticos, con un alto componente político e implicaron ajustes macroeconómicos costosos. El acuerdo de Bretton Woods sostenía que los países podían devaluar sus monedas sólo en presencia de desequilibrios fundamentales como resultado, por ejemplo, de caídas estructurales de sus términos de intercambio. Sin embargo, este trabajo sostiene que los desequilibrios en el mercado monetario fueron determinantes en la explicación de las crisis cambiarias durante el período de cambio fijo. El ensayo está organizado en tres partes. Primero, se plantea un modelo teórico simple para una economía pequeña y abierta con movilidad imperfecta de capitales en el que se puedan analizar las posibles causas de las devaluaciones nominales. En segundo lugar, se emplea un enfoque narrativo para describir las circunstancias económicas que rodearon cada una de las devaluaciones: así como la revisión de evidencia cualitativa de la época. Finalmente, se realiza un conjunto de ejercicios econométricos para identificar las variables determinantes de los desequilibrios macroeconómicos que precedieron cada crisis cambiaria. Los resultados muestran que los desajustes externos estuvieron primordialmente asociados con desequilibrios en el mercado monetario. Los movimientos adversos en los términos de intercambio explican sólo una pequeña porción de las crisis cambiarias.
    Keywords: Bretton Woods
    JEL: N16
    Date: 2005–06–10
  28. By: Joel Fried (University of Western Ontario)
    Abstract: The Foreign Property Rule (FPR), limiting the holding of foreign property in pension plan assets, is scheduled to be eliminated this year. It has been rationalized on economic grounds by asserting that it improves the value of the dollar and decreases the cost of capital yet, at the time the FPR began, the government was trying to keep the dollar from rising and there were strong capital inflows. Further, evidence from the past changes in the FPR indicates it had little, if any, affect on the cost of capital and exchange rate, but cost middle income workers between one and three billion dollars per annum when set at 30%. I argue that the reason for its existence was the then common belief that governments could make better economic allocation decisions than markets. Removing the FPR provides pension plans with greater opportunity for risk adjusted returns as well as responsibilities. Relevant issues that arise include the degree of foreign currency exposure that is desirable and the degree of active management desired in foreign assets, and whether it makes sense to choose fund managers that are regionally focused rather than global. Pension boards will also have to rethink what a Canadian fund is and whether it should mimic Canadian production (as currently structured) or Canadian consumption patterns. An encouraging aspect of eliminating the FPR is the possibility that government ideology is changing to place greater emphasis on the positive benefits of using markets to allocate resources.
    Date: 2005
  29. By: Alejandra RANGEL; Catalina DELGADO; Jorge CEPEDA; Germán MUÑOZ
    Abstract: Debido a la importancia de los servicios en la producción, el empleo y el comercio internacional, la eliminación de las barreras al comercio de este sector y su consecuente liberalización, se ha convertido en uno de los principales objetivos de las negociaciones comerciales llevadas a cabo en los últimos años. Dado que Colombia se encuentra actualmente impulsando la negociación de un tratado bilateral con Estados Unidos, resulta conveniente examinar los últimos tratadosfirmados por este país a fin de establecer el grado de liberalización de los países en el sector servicios. Para esto, se requiere una metodología que tenga en cuenta que las barreras al comercio en este sector no son aranceles -como en el comercio de bienes- sino regulaciones internas de los países. En este documento, se empleó el tradicional índice de Hoekman para comparar algunos acuerdos firmados por Estados Unidos, el TLCAN con México y Canadá y los TLC con Chile y Singapur. La metodología muestra que, en promedio, el tratado menos liberal es el firmado entre EEUU y Chile, y el más abierto es el TLCAN. Sin embargo, el grado de liberalización de Estados Unidos cambia en cada uno de los tratados, lo mismo sucede por sectores.
    Keywords: comercio de servicios
    Date: 2005–01–26
  30. By: Laura Ehrlich; Ülo Kaasik; Anu Randveer
    Abstract: The paper focuses on the benefits, challenges and risks of the Estonian economy stemming from close relations with its main foreign partners Finland and Sweden, through foreign direct investments and foreign trade. The paper gives a short overview of Finnish and Swedish economies to provide a background for the analysis of the characteristics of FDI and trade flows between Estonia and these countries. As Estonia is a very small and open economy main benefits and challenges are related to it. The authors find that FDI from Finland and Sweden increase the credibility of Estonian economy, but as foreign investment flows are subject to push factors they have the potential of destabilising capital flows, because these two countries make over 70% of FDI into Estonia. The authors also find that the dynamics of Estonian exports to Finland and Sweden (which make more than half of total exports) is generally determined by the demand factors of those countries.
  31. By: Marc Hofstetter
    Abstract: En 1999 la Corte Constitucional determinó que los incrementos en el salario mínimo no debían hacerse por debajo de la inflación pasada. En este artículo exploramos el impacto de esta decisión sobre la efectividad de la política monetaria. En el marco de un modelo macroeconómico sencillo, se muestra que obligar a los agentes a ajustar el salario teniendo en cuenta los precios pasados, implica que la política monetaria tiene un mayor efecto sobre la actividad real y genera una persistencia más alta de la inflación. Estos resultados se cumplen aun bajo los supuestos clásicos más tradicionales: expectativas racionales, perfecta credibilidad y ajustes sincronizados de los precios.
    Keywords: Política monetaria
    JEL: E31
    Date: 2005–06–25
  32. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: Anti-trust cases more often than not hinge upon market definition. The anti-trust authorities use standardised tests for the purpose, like the "small but significant and nontransitory increase in price" test prevalent in US law. These tests are often read as neoclassical economics, watered down to legal scale. They then are interpreted by economic concepts like cross price elasticities. These interpretations rest on methodological individualism. Social phenomena, like competition, are explained from the perspective of actors maximising their individual utility. If one wants to understand how an individual firm is controlled by competition, this is a most helpful approach. But for defining the effective area of competition, or the relevant market, methodological holism is more powerful. Its basic conceptual unit is not the individual, but communication. Markets are seen as implicitly or explicitly organised entities, giving an industry an identity, and helping the consumers orient themselves in a complex environment. Specifically, a market turns out to be a hybrid between co-operation (for constituting the area of competition) and conflict (within the area thus defined). This alternative approach is important for anti-trust practice. The decisive fact is not whether two products "objectively ought to be" substitutes. What market participants see as substitutes is the only thing that matters. Consequently, for market definition, anti-trust authorities may not (only) rely on their own wisdom. They must find ways to reconstruct the communication among market participants.
    Keywords: Market Definition, Constructivism
    JEL: B50 L40 L41
    Date: 2003–11
  33. By: EVA RAQUEL PORRAS (Instituto de Empresa)
    Abstract: There is a general consensus that expected returns are notoriously difficult to predict for many reasons, including modeling and econometric problems. The bubble and contagion literature proposes fundamentals and contagion proxies as explanatory of financial asset´s price changes. This paper uses mean and semiparametric methods to analyze the explanatory value of some of these variables. The goal of this study is to determine which variables have higher explanatory value as well as their differential impact throughout the distribution of returns. The findings suggest that none of the twelve different models used to proxy fundamentals have any explanatory value for price changes.
    Keywords: Bubbles, Panel data, Contagion, Semiparametric methods, Financial asset prices, Quantile regression
    Date: 2004–06
  34. By: Marit Hinnosaar; Hannes Kaadu; Lenno Uusküla
    Abstract: The paper presents empirical estimations of the equilibrium exchange rate of the Estonian kroon. The behavioural equilibrium exchange rate (BEER) approach is used to analyse the dynamics of the real effective exchange rate in the time period from 1995 to 2002. The estimates range from a 15% undervaluation to a small overvaluation of the kroon in the beginning of the period and indicate a position close to equilibrium in 2002.
    Keywords: equilibrium exchange rate, BEER, cointegration, Estonia
    JEL: C22 F31
  35. By: EVA RAQUEL PORRAS (Instituto de Empresa)
    Abstract: This study uses cointegration tests to examine the relationships among the stock markets of Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela and the NYSE and Dow Jones Indexes. The goal of this paper to test whether cointegration exists between the stock market index of each of the mentioned developing nations, and the US stock market. Previous studies have shown that unit roots occur in stock price series. Our results also show that there is monthly and daily cointegration between the NYSE and the Dow Jones Indices and the security markets of Mexico and Venezuela, and no cointegration with the stock markets of Argentina, Brazil, Chile, Colombia, and Peru.
    Keywords: Diversification, Integration, International markets, Market Efficiency
    Date: 2004–09
  36. By: Zisimos Koustas (Department of Economics, Brock University); Jean-Francois Lamarche (Department of Economics, Brock University)
    Abstract: This paper utilizes tests for a unit root that have power against nonlinear alternatives to provide empirical evidence on the time series properties of the ex-post real interest rate in the G7 countries. We find that the unit-root hypothesis can be rejected in the presence of a nonlinear alternative motivated by theoretical literature on optimal monetary policy rules. This represents a reversal of the results obtained using standard linear unit-root and cointegration tests. Tests for linearity reject this hypothesis for Canada, France, Germany, Italy, and the US. For these countries we estimate nonlinear models to capture the dynamics of the ex-post real interest rate.
    Keywords: Fisher Effect; Unit Roots; Self-Exciting Threshold Autoregression
    JEL: E40 E50 C32
    Date: 2005–07
    Abstract: El modelo DNPensión es un modelo contable discreto, basado en un componente demográfico que simula el comportamiento del sistema pensional colombiano a un horizonte de 100 años. La versión 4.0 cuenta con la versatilidad necesaria para simular prácticamente cualquier cambio en los parámetros fundamentales que caracterizan un sistema pensional, en un lapso de tiempo considerablemente pequeño. El modelo se viene desarrollando de una manera continua desde 1999 y está basado en la idea original de Juan Carlos Parra Osorio. El objetivo de este documento es explicar el funcionamiento del modelo, comenzado por un análisis general de los datos que lo alimentan y una descripción de su funcionamiento. A manera de ilustración, se muestran los resultados de dos ejercicios. El primero cuantifica el déficit del ISS y Cajanal. El segundo evalúa diferentes escenarios del ejercicio de pilares, donde el primer pilar varía entre 1, 2, 3 y 4 SMLV. Finalmente se cierra este documento con un informe de la evolución del modelo, no sólo en materia de programación sino también en el tema de la calidad de la información que utiliza.
    Keywords: pensiones
    Date: 2005–06–01
  38. By: Chantal Dupasquier (UN Economic Commission for Africa); Patrick N. Osakwe (UN Economic Commission for Africa); Shandre M. Thangavelu (Department of Economics, National University of Singapore)
    Abstract: There are plans by five West African countries to establish a second monetary zone in the sub-region by December 2009. In this paper we ask whether a monetary union is the appropriate exchange rate regime for the sub-region based on economic criteria. We address the issue using a rigorous theoretical framework that captures the crucial trade-off between the savings in transaction costs, resulting from a common currency, and the macroeconomic stabilization benefits of a flexible exchange rate regime. The main result is that a flexible exchange rate regime dominates a monetary union in the ECOWAS subregion.
    Keywords: Exchange rates; Regimes; Welfare; Transaction costs; West Africa
    JEL: E52 F33 F41
  39. By: Andrea Monticini (University of Exeter); Giacomo Vaciago (Università Cattolica del Sacro Cuore)
    Abstract: This paper investigates the degree and nature of economic and monetary policy relations among the United States, the Euro area, and Great Britain. Using daily interest rates, we estimate the impact of monetary policy announcements of a Central Bank on its domestic market and in what measure those announcements are able to influence other financial markets. In particular, we analyse the effect of the FED, ECB, and BoE monetary policy announcements on European markets. We find that Europe’s interest rates have a relevant response to FED announcements.
    Keywords: Monetary policy; Term structure of interest rates.
    JEL: E4 E43 E52 F42
    Date: 2005–07–21
  40. By: Chrysostomos Mantzavinos (Faculty of Economics and Business, Witten/Herdecke University); Douglas C. North (Washington University, St. Louis); Syed Shariq (Institute for International Studies, Stanford University)
    Abstract: In this article, we provide a broad overview of the interplay among cognition, belief systems, and institutions, and how they affect economic performance. We argue that a deeper understanding of institutions’ emergence, their working properties, and their effect on economic and political outcomes should begin from an analysis of cognitive processes. We explore the nature of individual and collective learning, stressing that the issue is not whether agents are perfectly or boundedly rational, but rather how human beings actually reason and choose, individually and in collective settings. We then tie the processes of learning to institutional analysis, providing arguments in favor of what can be characterized as “cognitive institutionalism.” Besides, we show that a full treatment of the phenomenon of path dependence should start at the cognitive level, proceed at the institutional level, and culminate at the economic level.
    Date: 2003–12
  41. By: Grand Nathalie (Institut de la Méditerranée, Marseille, FRANCE); Dropsy Vincent (California State University, Fullerton, USA)
    Abstract: Morocco and Tunisia have started to open their markets to international trade and capital flows in order to bolster investment and growth. These liberalization programs require important adjustments in their economic policies, in particular their exchange rate regimes and monetary policies. This objective of this paper is to examine why Morocco and Tunisia should progressively opt for greater exchange rate flexibility as well as a monetary policy based on inflation targeting rather than exchange rate targeting and money-growth rules, as their markets are increasingly liberalized. First, their past economic policies are reviewed and analyzed. Second, the theoretical sources of inflation (cost push and demand pull factors as well as factors due to financial liberalization) are identified. Third, a Markov switching model with time-varying transition probabilities is estimated for Morocco and Tunisia to provide important information concerning the mechanisms underlying inflation regime changes. The empirical results provide evidence that high inflation regimes are more persistent in Morocco than in Tunisia, and that inflation regime switches can be explained by external shocks in the 1970s, and by the sound fiscal and monetary policies in the mid-1980s. Finally the institutional and operational conditions for the success of an inflation-targeting framework are outlined.
    Keywords: Markov switching; Inflation; Inflation targeting, Monetary policy, Central Banks; Policy Designs and Consistency; Policy Coordination; Morocco; Tunisia
    JEL: E
    Date: 2005–07–18
  42. By: Alvaro Aguiar (CEMPRE, Faculdade de Economia, Universidade do Porto); Manuel M. F. Martins (CEMPRE, Faculdade de Economia, Universidade do Porto)
    Abstract: This paper tests for asymmetries in the preferences of the Euro-Area monetary policymaker with 1995:I-2004:III data from the last update of the ECB's Area-wide database. Following the relevant literature, we distinguish between three types of asymmetry: precautionary demand for expansions, precautionary demand for price stability and interest rate smoothing asymmetry. Based on the joint GMM estimation of the Euler equation of optimal policy and the AS-AD structure of the macroeconomy, we find evidence of precautionary demand for price stability in the preferences revealed by the monetary policymaker. This type of asymmetry is consistent with the ECB’s definition of price stability and with the priority of credibility-building by a recently created monetary authority.
    Keywords: Central Bank Preferences, Asymmetry, Euro Area, Optimal Control, GMM.
    JEL: E52 E58 C32 C61
    Date: 2005–07
  43. By: Yongfu Huang; Jonathan Temple
    Abstract: Several recent papers have argued that trade and financial development may be linked, either for political economy reasons, or because foreign competition and exposure to shocks lead to changes in the demand for external finance. In this paper we use the cross-country and time-series variation in openness to study the relationship between trade and finance in more detail. Our results suggest that increases in goods market openness are typically followed by sustained increases in financial depth.
    Keywords: openness, trade, financial development.
    JEL: F13 O16
    Date: 2005–07
  44. By: Miroslav Verbic (Institute for Economic Research Ljubljana); Boris Majcen (Institute for Economic Research Ljubljana); Renger van Nieuwkoop (ECOPLAN Berne)
    Abstract: The article presents an analysis of welfare effects in Slovenia, an analysis of macroeconomic effects of the Slovenian pension reform and an analysis of effects of the pension fund deficit on sustainability of Slovenian public finances with a dynamic OLG general equilibrium model. It has been established that while young generations and new generations will lose from the pension reform, even complete implementation of the reform might not be sufficient to compensate unfavourable demographic developments. The level of expected deficit of the PAYG-financed state pension fund seems to be most worrying. Financing the pension system with VAT revenues as an extreme case could result in more sustainable public finances, since GDP and welfare levels ought to increase, yet this might be infeasible to implement politically, given that the generations of voters would have their welfare decreased. In addition, the present pension system is intransparent and tremendously complicated and should primarily be made more comprehensible to the public.
    Keywords: general equilibrium models, macroeconomic effects, OLG-GE, PAYG, pension system, sustainability of public finances, Slovenia, welfare analysis
    JEL: C68 D58 D61 D91 E62 H55
    Date: 2005–07–19
  45. By: Fabio Sánchez; Andrés Fernández; Armando Armenta
    Abstract: El objetivo general de la investigación es analizar la evolución, determinantes y efectos del dinero a través del siglo XX en Colombia. La investigación se concentra con mayor detalle después de 1923 año de la fundación del Banco de la República en 1923, pues la información es mejor y más abundante. Un ejemplo son las Actas de la Junta Directiva del Banco. El trabajo examina las decisiones de política monetaria bajo los distintos arreglos cambiarios e institucionales que tuvo el país: el de Patrón Oro, tasa de cambio fija, crawling peg, el régimen de bandas cambiarias y de flotación, estos dos últimos bajo un marco de independencia del Emisor. El análisis de la evolución del crecimiento del dinero durante el siglo XX muestra que su principal determinante fue el sector externo y, –en menor medida– los desequilibrios del sector público. En adición a los determinantes mencionados, la política monetaria se utilizó en forma contracíclica. Así, a pesar de que en el largo plazo no existe una relación sistemática entre el crecimiento del dinero y cambios en la actividad real –como sí con el nivel de precios–, la autoridad si explotó en el corto plazo la relación positiva entre estas dos variables. En forma paralela a los movimientos del dinero, el Banco de la República aumentó su presencia institucional y económica además de mejorar y consolidar sus instrumentos de política. El documento presenta, por una parte, un visión general del los movimientos del dinero a lo largo del siglo, y por otro, examina algunos de los episodios históricos monetarios relevantes. El análisis documenta el proceso de toma de decisiones por parte de la autoridad monetaria a partir de las fuentes primarias narrativas y de la recopilación de los indicadores económicos disponibles en cada momento histórico.
    Keywords: Política monetaria
    JEL: N16
    Date: 2005–05–15
  46. By: Fender, John.
    Abstract: Currently, local authorities in the UK raise only about a quarter of their revenues from taxes under their control. The Balance of Funding Review Report considered whether this proportion should be increased, and if so, how. This paper considers the report and possible reforms. Reasons why the balance of funding is a problem are discussed. However, there are problems with the current system apart from the balance of funding, and to solve some of these a closer link between council tax bills and property values is suggested. Whether a local income tax should be introduced as a supplement to a reformed council tax, and other possible reforms, are also discussed.
    Keywords: Balance of funding, property tax, business rates, local income tax
    Date: 2005–01
  47. By: Marit Hinnosaar
    Abstract: In the paper potential output of four Central and East European countries is estimated using the Cobb-Douglas production function. Estonian production function uses data of employment, sectoral restructuring, estimated capital stock and foreign direct investments. Capital stock and level of technology are estimated for the Central and East European countries using the same form of production function and parameter estimates of Estonian economy. Potential output is calculated using the long-term unemployment to approximate potential labour input in the production. According to the estimates potential output is higher than actual in all the countries during most of the period, except in the fast economic growth periods (in the Czech Republic in 1995-1996, Estonia in 1997-1998 and Latvia in 1997, respectively).
  48. By: Roberto Torrini (BANK OF ITALY)
    Abstract: Profit share in Italy has been growing between the mid-1970s and the mid-1990s, remaining stable at historically high levels since than. After dropping in the first half of the 1970s, owing to an unprecedented rapid rise in wages, profit share started to recover. The rise during the 1980s involved the entire business sector and was part of this recovery process. During the 1990s profit share continued to grow on average, but with large cross-sector differences. Profit share in manufacturing, which is more exposed to international competition, declined, together with the returns on capital stock, but increased in the rest of the business sector. We show that the better performance of the non-manufacturing business sector is mainly due to the industries most affected by the large-scale privatisations and restructuring of State-owned companies that began in the first half of the 1990s. They led to a rapid growth in total factor productivity and a deceleration in wages, without a major impact on the market power of privatised companies. On the contrary, profitability in the manufacturing sector was negatively affected by a loss of competitiveness in international markets.
    Keywords: factors shares, returns on capital, privatisations
    JEL: E25 E22 E24 L32 L33 J30
    Date: 2005–06
  49. By: LAURA MARTA NUÑEZ (Instituto de Empresa)
    Abstract: We use the GRASP procedure to select a subset of financial ratios that are then used to estimate a model of logistic regression to anticipate financial distress on a sample of Spanish firms. The algorithm we suggest is designed "ad-hoc" for this type of variables. Reducing dimensionality has several advantages such as reducing the cost of data acquisition, better understanding of the final classification model, and increasing the efficiency and the efficacy. The application of the GRASP procedure to preselect a reduced subset of financial ratios generated better results than those obtained directly by applying a model of logistic regression to the set of the 141 original financial ratios.
    Keywords: Genetic algorithms, Financial distress, Failure, Financial ratios, Variable selection, GRASP, Methaeuristic
    Date: 2004–10
  50. By: Alexander Correa Ospina
    Abstract: Los canales de transmisión monetaria son los mecanismos mediante los cuales las acciones de política monetaria influyen sobre las variables macroeconómicas, tales como inflación y producción. Un claro entendimiento del funcionamiento de estos canales es de vital importancia para el diseño de la política monetaria. Los cambios estructurales en la economía pueden alterar los efectos económicos de una medida de política monetaria. De igual forma, el contexto institucional y político en el que se implementa determinada política puede hacer que los efectos de esta medida sean diferentes a los deseados. En este artículo se analizan estas cuestiones, y a través de un sencillo modelo econométrico se concluye que el banco central de Colombia es un banco que da una mayor importancia relativa a la volatilidad de la inflación que a la volatilidad de la producción.
    Keywords: canales de transmisión
    JEL: E52
    Date: 2004–09–05
  51. By: Yan Olszewski (Maple Financial Alternative Investments)
    Abstract: Markowitz’s (1952) portfolio theory has permeated financial institutions over the past 50 years. Assuming that returns are normally distributed, Markowitz suggests that portfolio optimization should be performed in a mean-variance framework. With the emergence of hedge funds and their non-normally distributed returns, mean-variance portfolio optimization is no longer adequate. Here, hedge fund returns are modeled with the alpha-stable distribution and a mean-CVaR portfolio optimization is performed. Results indicate that by using the alpha- stable distribution, a more efficient fund of hedge funds portfolio can be created than would be by assuming a normal distribution. To further increase efficiency, the Hurst exponent is considered as a filtering tool and it is found that combining hedge fund strategies with particular Hurst exponents leads to the creation of more efficient portfolios as characterized by higher risk-adjusted ratios. These findings open the door for the further study of econophysics tools in the analysis of hedge fund returns.
    Keywords: hedge funds, fund of funds, portfolio optimization, conditional value at risk, alpha-stable distribution, Hurst exponent, fractals
    JEL: C61 E17 G11 G23
    Date: 2005–07–19
  52. By: Lucio Valerio Spagnolo, Mario Cerrato (CELPE-DISES, Università degli Studi di Salerno)
    Abstract: Comparing the economic performances between UK and Euroland, the appropriate and obvious question should be: why does not Euroland replace its euro with the British pound? However, economy does not represent all the interests of the human beings. They believe in values beyond the economy. Right! It may well be that Euroland citizens, once with the euro, feel much more confiance in themselves, as part of a larger world, as they trust the monetary and political decision makers of the EU Institutions. If that was the truth, the European integration process should proceed just like a ball thrown against standing skittle-pins waiting to be got down! Unfortunately, that is not the case. The authors try to point out some reasons to understand those British people who love to look at the euro experience, sitting in their armchairs and, above all, without loosing their national pound.
    Date: 2005–06
  53. By: Rasmus Pikkani
    Abstract: Modelling work on Estonian data indicates that external financing of the private sector has strong impact on domestic demand, which implies that valuable insights may be gained in this case from understanding the behavioural relationships in the monetary sector. The current paper provides a theoretical analysis of the monetary sector under a currency board regime and applies specification tests to Estonian data. As a final product, empirical equations for average lending rate, loans provided to the private sector and money demand are estimated. While estimations herein use monthly data, quarterly modifications of the model will be inserted into Eesti Pank\'s quarterly macromodel in the future.
  54. By: LAURA MARTA NUÑEZ (Instituto de Empresa)
    Abstract: (WP 03/04 Clave pdf) Previous studies have reported mixed results with regard to the success of technical trading rules.Studies that provide positive evidence are [Brock et al (1992), Karjalainen (1994), Bessembinder et al (1995),Mills (1997), and Fernandez et al (1999)]. Studies rejecting the utility of technical trading rules are [Hudson et al (1996) or Allen et al (1999)]. A recent body of work has applied evolutionary algorithms to the design of trading rules [see Karjalainen (1994), Allen et al (1999), Fernandez et al (2001) and Nuñez (2002)].This paper uses genetic algorithms to tests the forecastability of the moving average in the MSE.We report the lack of utility of this indicator.
    Keywords: Genetic algorithms, Madrid Stock Exchange, Moving average, Trading rules
    Date: 2004–02
  55. By: Falko Fecht (Deutsche Bundesbank); Antoine Martin (Federal Reserve Bank of New York)
    Abstract: Following Diamond (1997) and Fecht (2004) we use a model in which financial market access of households restrains the efficiency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks. Since monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect. But this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. Thus our results suggest that in the bank-dominated financial system of Germany, in which banks intensely compete for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' financial market participation might be beneficial.
    Keywords: Financial Intermediaries, Risk Sharing, Banking Competition, Comparing Financial Systems
    JEL: E44 G10 G21
    Date: 2005–07–19
  56. By: Arie Melnik; Oz Shy; Rune Stenbacka
    Abstract: For many years IO economists devoted attention to the size distributions’ of firms in a given industry. Most studies showed that the size distribution of firms in oligopolistic markets is highly skewed. There are many small firms and a few large firms. There is also a consensus that relative market shares are important and that large firms are, in general, more profitable and durable than small firms. Relative size is also important as a determinant of the structure of the industry. The concept is also central in strategic analysis of business firms and in the formulation of government (regulatory) policy. In this paper we propose to use an empirical measure of market leadership. The measure relies on the assumption that the degree of competition critically depends on how dominant the leading firm is in a given industry. The measure also takes into account the number of “significant” competitors in the market and how close they are to the leading firm in terms of size. The measure is simple to use and easy to interpret. It also yields a critical value that facilitates comparisons between different markets.
    Date: 2005–06
  57. By: Ford, James L; Kelsey, D; Pang, W
    Abstract: The paper studies the impact of ambiguity on history-dependant beahviour in the standard microstructure model of financial markets. We show that differences in ambiguity attitudes between market makers and traders can generate contrarian and herding behaviour in stock markets where assets are traded sequentially and trading prices are endogenously determined. We also show the mispricing can be only short-term, and in the long-run market is efficient in the sense that the market price aggregates information without distortions.
    Keywords: Ambiguity, Choquet Expected Utility, Generalized Bayesian update, Optimism, Herding, Contrarian behaviour
    JEL: D81 G1
    Date: 2005–05
  58. By: Paolo Angelini (Bank of Italy, Economic Research Department); Andrea Generale (Bank of Italy, Economic Research Department)
    Abstract: We address the question in the title using survey-based measures of financial constraints, as opposed to the proxies typically used in the literature. We find that in our dataset of Italian firms, those declaring to be financially constrained are smaller and younger than the others. However, the size distribution of non constrained firms is significantly skewed, and virtually overlaps with the FSD for the entire sample. Similar conclusions are drawn from the analysis of a large subsample comprising very young firms. These results are broadly confirmed using several non survey-based proxies of financial constraints, and over a second large sample including firms from OECD and non OECD countries. The analysis of the latter dataset suggests that financial constraints are a relatively more serious problem in developing countries. We conclude that financial constraints cannot be the main determinant of the FSD evolution over time, especially in financially developed economies.
    Keywords: firm size distribution, financial constraints.
    JEL: L11
    Date: 2005–06
  59. By: Virmantas Kvedaras; Olivier Basdevant
    Abstract: There is little evidence on the efficiency of the early stage of the capital market in transition countries, although market structure developments and the learning process could define the framework for efficient markets. The article tries to find out whether financial markets are efficient in the three Baltic States and if not, whether there are any signs of evolving to the efficient capital market. To answer these questions the analysis combines the methodology for testing the efficiency of capital market using the variance ratio robust to heteroscedasticity with the state-space representation, which enables us to use an efficient filtering technique - the Kalman filter - to get time varying autocorrelations. The official Estonian, Latvian, and Lithuanian stock exchange market indices TALSE, DJRSE, and LITIN comprising the most liquid parts of the stock market in a respective country are analysed. The main conclusion to be drawn from the analysis is that financial markets in the Baltic States are, with some turbulence, approaching weak form of efficiency.
  60. By: Lucio Vinhas de Souza
    Abstract: The aim of the paper is to empirically estimate whether the different monetary and exchange rate frameworks observed in the accession countries of Central and Eastern Europe and the Baltic States do yield different outcomes in terms of level and variance of a set of nominal and real variables. The author follows and extends the methodology developed by Kuttner and Posen (2001), who perform a combined analysis of the individual effects of exchange rate regimes, central bank independence and announced targets in nominal variables for a large set of developed and developing countries. They also estimate that a set-up combining a free float, an independent currency board and inflation targeting yields an outcome that mimics the price stabilisation advantages of a hard peg without its drawbacks in terms of extreme volatility. This sample of countries, not covered by the Kuttner and Posen study, supports their conclusions for both nominal and real variables, testing for both the individual and combined effects of the frameworks and indicating that a flexible exchange rate regime, coupled with CBI and DIT, would be Pareto-improving when compared to harder regimes.
  61. By: Olga Lucía Acosta; Luis Fernando Gamboa Niño
    Abstract: El documento hace una revisión de las principales fuentes de protección social que hay en Colombia y las características de los sistemas de protección de otros países. Se encuentra que gran parte de lo que se conoce como gasto social se destina al tema pensional y que los resultados de los fondos de solidaridad son muy pequeños frente a la autoprotección de los hogares. Se propone tener en cuenta los esfuerzos individuales y privados que hay en Colombia al diseñar un sistema de protección social, pues de lo contrario se estarían desincentivando estos esfuerzos.
    Keywords: Protección Social
    JEL: H11
    Date: 2005–06–01
  62. By: Fabio Filipozzi
    Abstract: The aim of the analysis presented here is to examine the behaviour of the real exchange rate of the Estonian kroon, to estimate its equilibrium value and investigate its impact on the competitiveness of Estonian economy. A brief account on possible measures of the real exchange rate (RER) is given, and then the real effective exchange rate (REER) weighted with domestic and foreign consumer price indices (CPI) is chosen for the estimation. A model for the equilibrium real exchange rate (ERER) determination suitable for a small open economy as Estonia is outlined and provides a theoretical basis for understanding what kind of fundamentals can affect real exchange rate behaviour. Given the short sample considered here, a single equation estimation method is used. The choice of fundamentals is determined both by particular features of the Estonian economy and data constraint. The fundamentals finally adopted are productivity differential between tradeables and nontradeables sectors, investment share, resource balance and nominal effective exchange rate. Having detected the existence of one cointegration vector between RER and fundamentals, it is possible to estimate the long-run relationship linking them and an error correction mechanism in order to have some information on short-run behaviour of the real exchange rate. Estimation results are then used to construct both ERER series and misalignment measures. To do this, some hypotheses on equilibrium/sustainable levels of fundamentals are set and discussed. Our simulation hence brings us to conclude that an appreciation of RER in the sample period occurred together with an appreciation of its equilibrium level. The latter appreciated slower, hence the initial undervaluation was corrected and the difference between RER and its equilibrium level shrank, leading to a slight overvaluation after the Russian crisis.
  63. By: CONCEPCION MARTIN (Instituto de Empresa)
    Abstract: (WPE 05/04 Clave pdf) Las empresas tecnológicas incluyen las de la nueva economía y aquellas cuya base de negocio es el I + D. El objetivo de este trabajo es evaluar y determinar cuáles son los métodos más adecuados de valoración para empresas tecnológicas. En concreto, mediante la aplicación práctica a una tecnológica española, se analizan cuáles son los cambios necesarios de realizar para aplicar los métodos de valoración tradicionales a este tipo de empresas y la validez del enfoque de opciones reales como método más adecuado para valorar este tipo de empresas. En este sentido, se concluye que valorar las empresas tecnológicas implica identificar y valorar las opciones reales.
    Keywords: Valoración de empresas, Valoración de opciones, Empresas tecnológicas, Opciones reales
    Date: 2004–02
  64. By: Iika Korhonen; Mare Randveer
    Abstract: This paper assesses the impacts of Economic and Monetary Union and the euro on developments within the EU and globally. The emphasis is on euro-11 countries and the eight most advanced accession candidates in Central and Eastern Europe. The single currency completes the project for a single market in Europe, and overall, clear efficiency gains for participating countries are expected. Low, stable interest rates should spur investment and the single currency should promote the formation of large, liquid capital markets, eventually transforming the structure of financial intermediation within the euro area. Although participating countries achieved a high degree of nominal convergence in the 1990s, this process now appears to have ended. Moreover, the conduct of a common monetary policy becomes more problematic with countries at different phases in the economic cycle. Accession candidates may use a variety of foreign exchange rate regimes before they join the EU, but ultimately their economic policies become a matter of common interest. Pressure to peg to the euro obviously increases as membership approaches, but there is compelling evidence that countries should hold back on pegging to the euro until they have achieved sufficient convergence to attain credibility for a policy of fixed exchange rates.
  65. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: The paper studies insurance with moral hazard in a system of contingent-claims markets. Insurance buyers are modelled as Cournot monopolists or oligopolists. The other agents condition their expectations on market prices, as in models of rational-expectations equilibrium with asymmetric information. Thereby they correctly anticipate accident probabilities corresponding to effort incentives induced by insurance buyers’ net trades. When there are many agents to share the insurance buyer’s risk, Cournot equilibrium outcomes are close to being second-best. In contrast, if insurance buyers are price takers, equilibria fail to exist or are bounded away from being second-best.
    Keywords: Insurance, Moral Hazard, Incentive Contracting, Walrasian Markets, Rational-Expectations, Cournot Equilibrium
    JEL: D50 D62 D80

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.