nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒07‒25
33 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Canales de transmisión monetaria: una revisión para Colombia By Alexander Correa Ospina
  2. Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker By Alvaro Aguiar; Manuel M. F. Martins
  3. Política monetaria y la corte constitucional: el caso del Salario mínimo. By Marc Hofstetter
  4. Underlying Inflation: Concepts, Measurement and Performance By Ivan Roberts
  5. Banks, Markets, and Efficiency By Falko Fecht; Antoine Martin
  6. Building a Better Fund of Hedge Funds: A Fractal and Alpha - Stable Distribution Approach By Yan Olszewski
  7. Sustainability of the Slovenian Pension System: An Analysis with an Overlapping-generations General Equilibrium Model By Miroslav Verbic; Boris Majcen; Renger van Nieuwkoop
  8. Growth, private investment and reforms : A comparative perspective By Ghazouani KAMEL
  9. Gender Inequality in a Globalizing World By Stephanie Seguino
  11. The intraday price of money: evidence from the e-MID market By Angelo Baglioni; Andrea Monticini
  12. The Price Puzzle and Indeterminacy By Efrem Castelnuovo; Paolo Surico
  13. Are Europe's Interest Rates led by FED Announcements? By Andrea Monticini; Giacomo Vaciago
  14. L’ATTRACTION DES IDE EST UNE QUESTION D’ADAPTATION INSTITUTIONNELLE : Modèle théorique et estimations pour les régions PECO & MENA By Ghazouani kamel
  15. Measuring inflation persistence: a structural time series approach By Maarten Dossche; Gerdie Everaert
  16. A theory of low inflation in a non Ricardian economy with credit Constraints. By Xavier Ragot
  17. Choice of Monetary and Exchange Regimes in ECOWAS: An Optimum Currency Area Analysis By Chantal Dupasquier; Patrick N. Osakwe; Shandre M. Thangavelu
  18. Deflation and Downward Nominal Wage Rigidity: Evidence from Japan By Kengo Yasui; Shinji Takenaka
  19. Policy-Induced Mean Reversion in the Real Interest Rate? By Zisimos Koustas; Jean-Francois Lamarche
  20. The Role of Liquidity and Implicit Guarantees in the German Twin Crisis of 1931 By Isabel Schnabel
  21. Macroeconomic Effects of Reallocation Shocks: A generalised impulse response function analysis for three European countries By Theodore Panagiotidis; Gianluigi Pelloni
  22. Estonian Inflation Model By Urmas Sepp; Andres Vesilind; Ülo Kaasik
  23. Assessment of the Euro\'s implications for European economic development By Iika Korhonen; Mare Randveer
  24. The monetary sector under a currency board arrangement : specification and estimation of a model with Estonian data By Rasmus Pikkani
  25. Monetary transmission mechanism in Estonia - some theorethical considerations and stylized aspects By Raoul Lättemäe
  26. Monetary transmission mechanism in Estonia - empirical model By Rasmus Pikkani
  27. The Core of a Macro-economic Model for Estonia By Olivier Basdevant; Ülo Kaasik
  28. Automatic fiscal stabilisers in Estonia: the impact of economic fluctatios on general government budget balance By Rasmus Kattai; Alvar Kangur; Martti Randveer
  29. The importance of the bank-lending channel in Estonia: evidence from micro-economic data By Reimo Juks
  30. Liquidity Constrains and Ricardian Equivalence in Estonia By Hannes Kaadu; Lenno Uusküla
  31. Estonian labor market institutions within a general equilibrium framework By Marit Hinnosaar
  32. Hooverism, Hyperstabilisation or Halfway-House? Describing Fiscal Policy in Central and Eastern European EU Members By Rasmus Kattai; John Lewis
  33. Application of investment models in foreign exchange reserve management in Eesti Pank By Andres Vesilind; Toivo Kuus

  1. 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
  2. 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
  3. 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
  4. By: Ivan Roberts (Reserve Bank of Australia)
    Abstract: This paper explores the concept of underlying inflation and the properties of various measures of underlying inflation in the Australian context. Underlying inflation measures are routinely calculated and monitored by central banks in many countries, including the Reserve Bank of Australia. Alternative measurement concepts are explored, and a range of measures that have been calculated for Australia are discussed and evaluated on the basis of statistical criteria. These criteria capture the intuition that a good measure of underlying inflation should be less volatile than CPI (or headline) inflation, be unbiased with respect to CPI inflation, and capture the 'trend' in CPI inflation so that, on average, CPI inflation will tend to adjust towards the measure of underlying inflation. In the Australian context, statistical measures of underlying inflation, such as the trimmed mean or weighted median, perform fairly satisfactorily against these criteria. The performance of these measures can be further improved by seasonally adjusting prices at the CPI component level. Although underlying inflation measures have become less necessary in the past decade as inflation itself has become less volatile, these findings suggest that underlying inflation measures can still add value to the analysis of inflationary trends.
    Keywords: underlying inflation; core inflation; trimmed mean; weighted median; volatility-weighted measures
    JEL: C43 E31
    Date: 2005–07
  5. 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
  6. 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
  7. 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
  8. By: Ghazouani KAMEL (Hight trade school of Tunis, Manouba University)
    Abstract: In this paper we empirically analyse the linkages among growth, investment and reforms in the South East Asian countries, in the North Africa and in the non CFA Sub-Saharan Africa economies over 1970-89 to 2003. These regions differ considerably among them selves as well as with regard to the rest of the world, in terms of resources endowment, structure of production , and also in terms of economic reforms , physical infrastructure, and human capital. Our empirical analysis has clearly revealed the importance and the complementarities between macroeconomic reforms, physical infrastructure, human capital and structural reforms for the growth prospects of the economies. These factors have shown a strong effect on growth and have contributed greatly to the growth process for north Africa countries and the non CFA sub Sahara African countries. In north Africa economies and in the Sub Sahara African countries, the lack of macroeconomic reforms, the deficiencies of the physical infrastructure and the human capital explain, although at differing degrees , well the deficit in economic growth. This has been particularly the case of road networks, electronic equipments, sanitary conditions and schooling. The model simulation shows that an improvement of secondary schooling and physical infrastructure, similar to South East Asia, would have stimulated North Africa economic growth by respectively 0.61percent and 0.17 percent against only 1.23 percent and 0.39 percent for non CFA Sub Saharan Africa
    Keywords: Growth , reforms, Human capital , Structural reforms, macroeconomic stability, PCA, investment, Panel
    JEL: C23 C82 E17 O40
    Date: 2005–07–22
  9. By: Stephanie Seguino (University of Vermont & The Levy Economics Institute)
    Abstract: Emphasis on market-friendly macroeconomic and development strategies in recent years has resulted in deleterious effects on growth and well- being, and has done little to promote greater gender equality. This paper argues that the example of East Asia states, which recognized their position as “late industrializers,” relied on a managed-market approach with the state that employed a wide variety of policy instruments to promote industrialization. Nevertheless, while Asian growth was rapid, it was not enough to produce greater gender equality. A concentration of women in mobile export industries that face severe competition from other low-wage countries reduces their bargaining power and inhibits closure of gender-wage gaps. Gender-equitable macroeconomic and development policies are thus required, including financial market regulation, regulation of trade and investment flows, and gender- sensitive public sector spending..
    Keywords: gender, inequality, industrial policy, firm mobility, trade
    JEL: L5 F4 E24 F16 J16 I31
    Date: 2005–07–20
  10. 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
  11. By: Angelo Baglioni (Università Cattolica del Sacro Cuore); Andrea Monticini (University of Exeter)
    Abstract: We present a simple model, where intraday and overnight interest rates are linked by a no-arbitrage argument. The hourly interest rate is shown to be a function of the intraday term structure of the overnight rate. This property holds under both assumptions, where an explicit intraday market for interbank loans exists and when it does not. In the first case, such a property is an equilibrium condition; in the second one it holds by definition, as a synthetic hourly loan is a portfolio of overnight contracts. We then provide empirical evidence, based on tick- by-tick data for the e-MID money market (covering the whole 2003). The overnight rate shows a clear downward pattern throughout the operating day. A positive hourly interest rate emerges from the intraday term structure of the overnight rate: we estimate the market price of a one hour interbank loan to be slightly above a half basis point.
    Keywords: intraday interest rate, overnight interbank loans, money market.
    JEL: G21 E43
    Date: 2005–07–21
  12. By: Efrem Castelnuovo (University of Padua); Paolo Surico (Bank of England & University of Bari)
    Abstract: This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs and two different identification strategies based on zero restrictions and sign restrictions, we find that the positive response of price to a monetary policy shock is historically limited to the sub-samples associated with a weak central bank response to inflation. These sub-samples correspond to the pre-Volcker period for the US and the pre-inflation targeting regime for the UK. Using a micro-founded DSGE sticky price model of the US economy, we then show that the structural VARs are capable of reproducing the price puzzle on artificial data only when monetary policy is passive and hence multiple equilibria arise. In contrast, the DSGE model never generates on impact a positive inflation response to a policy shock. The omission in the VARs of a variable capturing the high persistence of expected inflation under indeterminacy is found to account for the price puzzle observed on actual data.
    Keywords: Price puzzle, DSGE model, Taylor principle, Indeterminacy, SVARs
    JEL: E30 E52
    Date: 2005–07–20
  13. 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
  14. By: Ghazouani kamel (Ecole supérieure de commerce de Tunis)
    Abstract: Cet article analyse les éléments déterminants des flux nets d’IDE. Son cadre théorique repose sur le concept de l'adaptation institutionnelle à l'IDE, celle-ci affirme que l'IDE est moins déterminé par des éléments fondamentaux que par des variables institutionnelles qui se prêtent plus au changement, à savoir les politiques, les lois et leur application. La théorie de l'adaptation institutionnelle suggère que chaque pays a la possibilité d'identifier et de développer ses facteurs de compétitivité pour augmenter sa part dans l'investissement direct étranger global. Le concept d'adaptation à l'IDE est testé dans une étude économétrique sur données de PANEL à travers 37 économies représentant les pays des zones PECO et MENA. Il s’ensuit de cette analyse économétrique que les variables liées à l’environnement politique sont les éléments déterminants les plus significatifs des influx d'IDE. L'adaptation politique se reflète dans l'ouverture économique avec un minimum de contrôle sur le commerce et le taux de change. L'adaptation politique signifie aussi un état de droit sain et un bas niveau de corruption, reposant sur l'égalité et la transparence juridique et administrative. L'adaptation du marché est représentée par des volumes élevés d'échanges commerciaux, un bas niveau de taxation, un degré élevé d'urbanisation et la présence du crédit. Comme ces facteurs déterminants découragent le comportement arbitraire et la recherche du bénéfice personnel, les résultats des régressions économétriques prouvent que, bien qu'ils acceptent de négocier, les investisseurs cherchent la stabilité et la transparence et préfèrent des règlements nets et appliqués de façon régulière à des privilèges individuels obtenus par des marchandages. La façon dont les politiciens dirigent les institutions, les politiques, les lois et leur application est beaucoup plus importante aux yeux des investisseurs directs étrangers que des facteurs relativement immuables tels que l'importance de la population et le milieu socioculturel.
    Keywords: IDE, Adaptation institutionnelle, intégration, PECO, MENA, Panel
    JEL: E
    Date: 2005–07–22
  15. By: Maarten Dossche (National Bank of Belgium, Research Department); Gerdie Everaert (Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))
    Abstract: Time series estimates of inflation persistence incur an upward bias if shifts in the inflation target of the central bank remain unaccounted for. Using a structural time series approach we measure different sorts of inflation persistence allowing for an unobserved timevarying inflation target. Unobserved components are identified using Kalman filtering and smoothing techniques. Posterior densities of the model parameters and the unobserved components are obtained in a Bayesian framework based on importance sampling. We find that inflation persistence, expressed by the halflife of a shock, can range from 1 quarter in case of a costpush shock to several years for a shock to longrun inflation expectations or the output gap.
    Keywords: Inflation persistence, inflation target, Kalman filter, Bayesian analysis.
    JEL: C11 C13 C22 C32 E31
    Date: 2005–06
  16. 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
  17. 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
  18. By: Kengo Yasui (Graduate School of Economics, Osaka University); Shinji Takenaka (Graduate School of Economics, Osaka University)
    Abstract: This study empirically analyzed downward nominal wage rigidity using time-series cross-industry data from 1981 to 2002, a period which included deflation. We found that nominal wages remained rigid to downward pressure by expected deflation and labor-market tightness. Estimations according to worker age categories revealed downward wage rigidity with deflationary pressure for most age categories. Wage rigidity during labor-market tightness was greater for younger workers.
    Keywords: wage rigidity, nominal wage, deflation, unemployment, Japan
    JEL: E24 E31 J30
    Date: 2005–07
  19. 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
  20. By: Isabel Schnabel (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: Using monthly balance-sheet data of all major German credit banks, we analyze deposit with-drawals and bank failures in the German banking and currency crisis of 1931. We find that de-posit withdrawals were driven by the run on the currency, but were also related to banks’ liquidity positions; that branch banks were no more stable than unit banks; and that large banks were privileged, being bailed out and receiving preferential access to the discount window. These findings underline the importance of liquidity and implicit guarantees in twin crises, while they question the benefits of branching in such crises.
    Keywords: Twin crises, liquidity, implicit guarantees, “too big to fail”
    JEL: G21 E5 N24 C34
    Date: 2005–03
  21. By: Theodore Panagiotidis (Dept of Economics, Loughborough University); Gianluigi Pelloni (University of Bologna)
    Abstract: We develop a generalised impulse response function (GIRF) approach to explore the different impacts of aggregate and sectoral shocks within a VAR-GARCH-M model. Using the output of our GIRF analysis, we explore the behaviour of three European countries (Germany, Spain and the UK). We analyse the aggregate and sectoral responses to discriminate among three different hypotheses of business cycle fluctuations. Links are established and explanations are provided within the still experimental character of our exercise.
    Keywords: sectoral shifts, employment fluctuations, generalised impulse response function.
    JEL: E30 C10 J21
    Date: 2003–12
  22. By: Urmas Sepp; Andres Vesilind; Ülo Kaasik
    Abstract: The objective of model-building was an inflation model suitable for prognosis as well as for simulation. The model serves two purposes. First of all, it is a tool for analysing inflation. Secondly, it is part of the model of Estonian economy, which completes the adjustment loop of the macromodel. The theoretical background of the inflation model derives from four basic features of Estonian economy. Namely, Estonia is: a small and open economy, a transitional economy, economy under currency board arrangement and a market economy. When estimating the model, inflation was decomposed into a) underlying inflation which is a long-run process and b) inflation deviations from the equilibrium which are caused by the short-run impact of inflation factors. The underlying inflation, which reflects the convergence, is determined as a trend. The latter was specified as a time function, ARMA process, moving average and HP filter, whereas the best result was obtained with time function. According to modelling output the short run dynamics of the inflation are determined by three main factors - demand pressure reflected by the GDP gap, exchange rate of the US dollar (which is proxy for foreign prices), and administrative action for correcting regulated prices. The adequacy of the model has been tested on the basis of ex post and ex ante prognosis. The model provided acceptable results in the simulation of endogenous and exogenous shocks
  23. 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.
  24. 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.
  25. 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.
  26. 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.
  27. By: Olivier Basdevant; Ülo Kaasik
    Abstract: This article presents a macro-econometric model for Estonia currently developed at the Bank of Estonia. It is based on a basic macro-economic framework that integrates both supply and demand side components. With this model we analyse the policy that should be implemented to maintain sustainable growth. The main emphasis is on the need to continue tough fiscal policy in order to maintain public deficit, as well as to avoid inflationary pressures and keep Estonia attractive to foreign investors.
  28. By: Rasmus Kattai; Alvar Kangur; Martti Randveer
    Abstract: The paper discusses the functioning of automatic fiscal stabilisers in Estonia. The aim of the research is to evaluate government budget sensitivity to economic fluctuations and thereby assess the importance of automatic fiscal stabilisers in Estonia. Specifically we are interested in whether the functioning of automatic fiscal stabilisers might under certain circumstances create difficulties for the fulfilment of the Maastricht deficit criterion according to which public deficit is not allowed to exceed the limit of 3% of GDP. The results of our research show that the role of automatic fiscal stabilisers is modest in Estonia. Budgetary sensitivity was approximately 0.35 in the period 1996-2001 - an increase in output gap by 1 percentage point causes a change in the budget balance by 0.35% of GDP. According to that maximum value, the budget\'s reaction was only 1.3% of GDP (while the output gap was -3.9%). A positive implication of this is that Estonia has good chances of holding the budget balance within the requested ceilings. If the output gap reaches -5%, structural deficit may still be 1% of GDP without the actual balance exceeding the 3% deficit boundary.
    Keywords: automatic fiscal stabilisers, structural budget balance, economic cycle, fiscal policy
    JEL: E32 H2 H5 H6 H87
  29. 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
  30. By: Hannes Kaadu; Lenno Uusküla
    Abstract: This paper aims to find evidence of the influence of government deficit on private consumption in Estonia. The data only shows some support for Ricardian equivalence. Two approaches were used in the empirical tests. The Haque and Montiel (1989) equation of consumption was estimated using an instrumental variables technique. The Aschauer (1985) system of equations was estimated with the full information maximum likelihood method. Formal tests based on macro data could neither reject nor confirm the existence of liquidity constraints or Ricardian equivalence. There remains a lot of room for testing both of these hypotheses in Estonia. Further efforts to test liquidity constraints should concentrate on using micro data.
    Keywords: Ricardian equivalence, liquidity constraints, Estonia
    JEL: E21 E62 H62
  31. By: Marit Hinnosaar
    Abstract: The implications of the Estonian labor market policy reforms, such as changes to the minimum wage, social benefits and tax allowance, will be analysed using a simple applied general equilibrium model. The model used in the paper is from Bovenberg et al (2000), with the addition of an efficiency wage section based on Shapiro and Stiglitz (1984). The model integrates union bargaining and efficiency wage theory into a traditional CGE model framework.
    Keywords: computable general equilibrium models, unemployment, lowskilled labor, minimum wage, benefits, tax allowance
    JEL: D58 E62 J32 J50
    Date: 2004–10–20
  32. By: Rasmus Kattai; John Lewis
    Abstract: This paper develops a simple framework for describing fiscal policy where policymakers attempt to minimise deviations in output and budget balance from target values. Optimal policy is given by minimising a quadratic loss function subject to a linear structure of the economy. This policy can be viewed as weighted average of two polar cases - the case where the budget deficit adjusts to eliminate any deviations from potential output (hyperstabilisation), and the case where taxes and spending are determined exclusively by some budgetary goal (hooverism). We find some evidence of stabilisation for Poland, Latvia and Estonia. There is no evidence for the Czech Republic, Lithuania, Slovakia and Slovenia, suggesting that fiscal policy was being used for other objectives. The best fit is for Estonia, suggesting that a strict fiscal policy environment may not be incompatible with stabilising fiscal policy.
    Keywords: Fiscal Policy, Fiscal Policy Rules, New EU Member States
    JEL: E61 E62
  33. 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

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