nep-tra New Economics Papers
on Transition Economics
Issue of 2005‒04‒16
57 papers chosen by
Toño Sanchez
Universitat de Valencia

  1. Impact of Ownership Structure on the Performance of China’s Feed Mill Sector, The By Fabiosa, Jacinto F.
  2. Impact of Ownership Structure on the Performance of China’s Feed Mill Sector, The By Fabiosa, Jacinto F.
  3. Risk of the Chinese trade integration for the Italian trade specialisation By Alessia Amighini; Stefano Chiarlone
  5. Locating Multinational Companies in China: Korean and Japanese Companies By Sung Jin Kang; Hong Sik Lee
  7. Productivity Growth in China: Evidence from Chinese Provinces By Xiang Ao; Lilyan E. Fulginiti
  8. Measuring Total Factor Productivity: Growth Accounting for Bulgaria By Kaloyan Ganev
  9. Anti-corruption trainig programs in center and eastern Europe By bryane michael
  10. The Impact of Current Account Reversals on Growth in Central and Eastern Europe By Martin Melecky
  11. The Development of Financial Markets in Poland By Lucjan T Orlowski
  12. Crise Financeira Russa By Bruno José Marques Pinto; Thais Machado de Matos Vilela; Ursula Silveira Monteiro de Lima
  13. Foreign Banks in Transition Economies: Small Business Lending and Internal Capital Markets By Ralph de Haas; Ilko Naaborg
  14. The Internationalization Efforts of Lithuanian Manufacturing Firms - Strategy of Luck? By Audra I.Mockaitis; Erika Vaiginiene; Vincent Giedraitis
  15. China's Changing Competitive Position: Lessons from a Unit-Labor- Cost-Based REER By Sebastian Dullien
  16. The Influences in Changes in Macroeconomic Regime and Policy on the Development of the Foreign Trade of Serbia By Danica Popovic
  17. FOREIGN TRADE INSTITUTIONS AND POLICIES - The Case of FR Yugoslavia By Danica Popovic
  18. Crise Financeira Russa By Bruno Marques Pinto; Thais Vilela; Ursula Silveira de Lima
  19. Trade Flows among CEEC and EU Countries: what future perspectives? By José Caetano; Aurora Galego
  20. Monetary Convergence And Risk Premiums In The EU Candidate Countries By Lucjan T Orlowski
  21. A Dynamic Approach to Inflation Targeting in Transition Economies By Lucjan T Orlowski
  22. Lending Booms in Europe’s Periphery: South-Western Lessons for Central-Eastern Members By Michal Brzoza-Brzezina
  23. Measuring China's Fiscal Policy Stance By Sebastian Dullien
  24. A Crise Financeira Russa By Bruno José Marques Pinto; Thais Machado de Matos Vilela; Ursula Silveira Monteiro de Lima
  25. Chinese Regional Agricultural Productivity in the 1990'a By Haizhi Tong; Lilyan E. Fulginiti
  26. Regional Innovation System in the Pomeranian Province of Poland By El¿bieta Wojnicka; Przemys³aw Rot; Piotr Tamowicz; Tomasz Brodzicki
  27. Wage and Income Inequality in Slovenia, 1993-2002 By Tine Stanovnik; Miroslav Verbic
  28. Inter-Regional Price Convergence and Market Integration in Russia By Konstantin Gluschenko
  29. Sorting, Selection, and Transformation of Return to College Education in China By Belton M Fleisher; Haizheng Li; Shi Li; Xiaojun Wang
  30. Monetary policy transmission in the CEECs : revisited results using alternative econometrics. By Jérôme Héricourt
  31. Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience By Tomáš Holub
  32. Stress Testing: A Review of key Concepts By Martin Čihák
  33. Designing Stress Tests for the Czech Banking System By Martin Čihák
  34. External and Fiscal Sustainability of the Czech Economy: A Quick Look Through the IMF’s Night-Vision Goggles By Aleš Bulíř
  35. The CNB’s Policy Decisions – Are They Priced in by the Markets? By David Navrátil; Viktor Kotlán
  36. Determining Factors of the Czech Foreign Trade Balance; Structural Issues in Trade Creation By Vladimír BenáÄek; Ladislav Prokop; Jan Ã. Víšek
  37. Components of the Czech Koruna Risk Premium in a Multiple-Dealer FX Market By Alexis Derviz
  38. Some Exchange Rates Are More Stable than Others; Short-Run Evidence from Transition Countries By Aleš Bulíř
  39. FOREX Microstructure, Invisible Price Determinants, and the Central Bank’s Understanding of Exchange Rate Formation By Alexis Derviz
  40. Czech Fiscal Policy: Introductory Analysis By Vladimír Bezděk; Kamil Dybczak; Aleš Krejdl
  41. Price Convergence: What Can the Balassa–Samuelson Model Tell Us? By Tomáš Holub; Martin Čihák
  42. Credit Risk, Systemic Uncertainties and Economic Capital Requirements for an Artificial Bank Loan Portfolio By Alexis Derviz; Narcisa KadlÄáková; Lucie Kobzová
  43. Optimum Currency Area Indices – How Close is the Czech Republic to the Eurozone? By Luboš Komárek; Zdeněk Čech; Roman Horváth
  44. ERM II Membership – the View of the Accession Countries By Luboš Komárek; Zdeněk Čech, Roman Horváth
  45. Modelling the Second-Round Effects of Supply-Side Shocks on Inflation By Tibor Hlédik
  46. Predicting Bank CAMELS and S&P Ratings: The Case of the Czech Republic By Alexis Derviz; Jiří Podpiera
  47. EU Enlargement and Endogeneity of some OCA Criteria: Evidence from the CEECs By Ian Babetskii
  48. The Role of Banks in the Czech Monetary Policy Transmission Mechanism By Anca Pruteanu
  49. Consumers, Consumer Prices and the Czech Business Cycle Identification By Jiří Podpiera
  50. Identification and Measurement of Relationships Concerning Inflow of FDI: The Case of the Czech Republic By Petr Král
  51. Credit Risk and Bank Lending in the Czech Republic By Narcisa KadlÄáková; Joerg Keplinger
  52. Eigenvalue Decomposition of Time Series with Application to the Czech Business Cycle By Jaromír Beneš; David Vávra
  53. Beyond Balassa - Samuelson: Real Appreciation in Tradables in Transition Countries By Martin Cincibuch; Jiri Podpiera
  54. Exchange Rates in the New EU Accession Countries: What Have We Learned from the Forerunners By Aleš Bulíř; Kateřina Šmídková
  55. Estimation of the J-Curve in China By Jaleel Ahmad; Jing Yang
  56. The Reasons for and the Impact of Antidumping Protection: The Case of People's Republic of China By Tianshu Chu; Thomas J. Prusa
  57. Organization, Program and Structure: An Analysis of the Chinese Innovation Policy Framework By Can Huang; Celeste Amorim; Joaquim Borges Gouveia; Mark Spinoglio; Augusto Medina

  1. By: Fabiosa, Jacinto F.
    Abstract: In the decade of the 1990s, China’s feed sector became increasingly privatized, more feed mills opened, and the scale of operation expanded. Capacity utilization remained low and multi-ministerial supervision was still prevalent, but the feed mill sector showed a positive performance overall, posting a growth rate of 11 percent per year. Profit margin over sales was within allowable rates set by the government of China at 3 to 5 percent. Financial efficiency improved, with a 20 percent quicker turnover of working capital. Average technical efficiency was 0.805, as more efficient feed mills increasingly gained production shares. This study finds evidence that the increasing privatization explains the improved performance of the commercial feed mill sector. The drivers that shaped the feed mill sector in the 1990s have changed with China’s accession to the World Trade Organization. With the new policy regime in place, the study foresees that, assuming an adequate supply of soy meal and an excess capacity in the feed mill sector, it is likely that China will allow corn imports up to the tariff rate quota (TRQ) of 7.2 mmt since the in-quota rate is very low at 1 percent. However, when the TRQ is exceeded, the import duty jumps to a prohibitive out-quota rate of 65 percent. With an import duty for meat of only 10 to 12 percent, China would have a strong incentive to import meat products directly rather than bringing in expensive corn to produce meat domestically. This would be further reinforced if structural transformation in the swine sector would narrow the cost differential between domestic and imported pork.
    Date: 2005–04–04
  2. By: Fabiosa, Jacinto F.
    Abstract: In the decade of the 1990s, China’s feed sector became increasingly privatized, more feed mills opened, and the scale of operation expanded. Capacity utilization remained low and multi-ministerial supervision was still prevalent, but the feed mill sector showed a positive performance overall, posting a growth rate of 11 percent per year. Profit margin over sales was within allowable rates set by the government of China at 3 to 5 percent. Financial efficiency improved, with a 20 percent quicker turnover of working capital. Average technical efficiency was 0.805, as more efficient feed mills increasingly gained production shares. This study finds evidence that the increasing privatization explains the improved performance of the commercial feed mill sector. The drivers that shaped the feed mill sector in the 1990s have changed with China’s accession to the World Trade Organization. With the new policy regime in place, the study foresees that, assuming an adequate supply of soy meal and an excess capacity in the feed mill sector, it is likely that China will allow corn imports up to the tariff rate quota (TRQ) of 7.2 mmt since the in-quota rate is very low at 1 percent. However, when the TRQ is exceeded, the import duty jumps to a prohibitive out-quota rate of 65 percent. With an import duty for meat of only 10 to 12 percent, China would have a strong incentive to import meat products directly rather than bringing in expensive corn to produce meat domestically. This would be further reinforced if structural transformation in the swine sector would narrow the cost differential between domestic and imported pork.
    Date: 2005–04–04
  3. By: Alessia Amighini; Stefano Chiarlone
    Abstract: The move towards export-oriented development strategies by China has increased concerns about the ability of Italian manifactures to effectively face price competition from emerging economies. This paper explores the hypothesis that the superior quality of Italian goods could support Italian competitiveness, using Spain as a benchmark. The data confirm that, although Italian and Chinese specialisation patterns are very similar, there is no widespread overlapping at the product level, and when there is, Italian goods show a higher quality level. Nonetheless, during the last decade, trade overlap increased and quality gap narrowed, suggesting that China is putting increasing competitive pressures on Italian manufacturing. In order to maintain its qualitative advantage, there is urgent need in Italy for an increase in investment in product upgrading and innovation.
    Date: 2004–06
  4. By: Jaan Masso; Karsten Staehr
    Abstract: The paper seeks to explain the inflationary dynamics in the Baltic countries since the mid-1990s. While single-equation estimations generally yield poor results, panel data estimations provide statistically and economically satisfactory findings. Our main result is that the observed gradual disinflation can to a large extent be explained by adjustment to international prices. Stringent fixed exchange rate systems have exerted downward pressure on inflation both directly and via expectations of future inflation. Measures of excess capacity in the labour market have no effect on inflation, while industrial output gaps have some explanatory power. Real oil price shocks have an immediate but short-lived impact on inflation.
    Keywords: Inflation, exchange rates, Phillips curve
    JEL: E31 E42 P24
    Date: 2005
  5. By: Sung Jin Kang (Korea Institute for International Economic Policy); Hong Sik Lee (Korea Institute for International Economic Policy)
    Abstract: By using aggregate and firm level data of Korean and Japanese foreign affiliates in China ,we investigate the recent FDI trends and the determinants of location choice. The comparison of the FDI trends of Japanese and Korean companies show that Korean companies are concentrated into China, especially in three regions of northeast of China. The conditional logit estimation results differ between Korean and Japanese companies. Even though agglomeration variable is shown to be positive and significant for two countries, regional income is shown to be positive for Japan but negative for Korea. For Korean companies, the college graduate, the railway variables and trade share are shown to be positive and significant but other variables such as the number of economic zones and the share of production by government-owned companies to total regional production are shown to be negative. In addition, the distance form Korea and the ethnicity factor might play more significant roles in FDI decisions as well. Thus, we can interpret that the main determinants such as agglomeration, vertical, horizontal FDI and infrastructural variables play significant roles in explaining recent FDI location. However, explanatory power of those variables above for location decision of Japanese companies is not significant.
    Keywords: multinational companies, China, Korean companies, Japanese companies, FDI
    JEL: F11 F12
    Date: 2004–01
  6. By: Edgar L. Feige (University of Wisconsin-Madison)
    Abstract: In earlier papers on “Socialist privatization” Feige proposed a sequential set of stabilization, privatization and liberalization policies designed to provide the necessary, albeit not sufficient conditions, for a transition from a planned to a market economy. An important component of the proposed policy package was an equalitarian distribution of a portion of “state” wealth to private citizens by means of a voucher program whose aim was to establish a social safety net of private wealth composed of “citizen shares” to cushion the disruptions and lessen the hardships of the transition process. This paper estimates the value of the proposed “citizen shares” and finds that they would have provided a significant social safety net as well as a powerful incentive for Soviet citizens to support the reform program. The problem with the proposed voucher program was not that it provided too little incentive. The problem was that the government failed to provide the relevant information to the public and that government information was not likely to be viewed as credible by its citizens. Reference: Comparative Economic Studies. Vol. XXXII No. 3, Fall, 1990
    Keywords: Transition, privatization, property rights, social safty net, Russia, voucher scheme.
    JEL: P2 P3 H82 H54 D63
    Date: 2005–01–22
  7. By: Xiang Ao (University of Nebraska); Lilyan E. Fulginiti (University of Nebraska)
    Abstract: Young (1995) estimated Total Factor Productivity (TFP) growth for Hong Kong, Taiwan, Singapore and South Korea. He reported moderate growth rates for these four regions. This means that rapid growth of GDP in these four economies is due mainly to fast increase of inputs. Young (2000) also estimated the TFP growth rate of China to be 1.4% per year during the period of 1978 to 1998. Similar to his claim for the four 'Asian Tigers', he concluded that 'the productivity performance of the non-agricultural economy (of China) during the reform period is respectable, but not outstanding.' China's real GDP grew at about 9% every year during that period. Is this extraordinary growth rate only due to factor accumulation? Or is it to a large degree due to improved efficiency and innovations? To answer this question, this study uses a panel dataset of real GDP, capital stock, and labor force for 30 provinces for 1978 to 1998 to estimate the TFP for the Chinese economy. Two approaches are used to estimate the aggregate production technology: a fixed-effects model and a stochastic frontier model. Our results are consistent across models indicating a TFP growth rate of 4.9% and 3.3% respectively. Both estimates are higher than Young's 1.9%. Our estimates also indicate that national average of TFP's contribution to GDP growth amount to 41.3% and 38.7%, respectively. Other results of interest indicate that capital has contributed more than labor to GDP growth and that technological change has been labor using.
    Keywords: Productivity growth, China, provinces, stochastic frontier, TFP, technical change, efficiency change
    JEL: O47 O53
    Date: 2005–02–28
  8. By: Kaloyan Ganev (Agency for Economic Analysis & Forecasting)
    Abstract: Total factor productivity measurement enables researchers to determine the contribution of supply-side production factors to economic growth. For Bulgaria, which is a transition economy, it is difficult to construct a production function with stable parameters, mostly because there are atypical developments of capital and labor during periods of economic growth, as well as due to the lack of sufficiently long and dependable data series. In this respect, growth accounting enables us to identify the basic sources and directions of influences. The calculations that have been carried out in this paper help in the identification of total factor productivity development as the main driving force of economic growth. The likely reasons for this strong influence have been also outlined.
    Keywords: Economic Growth, total factor productivity
    JEL: E22 O47
    Date: 2005–04–13
  9. By: bryane michael (University of Oxford)
    Abstract: Drawing upon the work of the NISPAcee Working Group on Preventing Corruption in Public Administration, this book reviews the current state of anti-corruption training and education in Central and Eastern Europe. Original data and analysis from anti-corruption trainers and policymakers from over 7 countries in the region -- Kosovo, Latvia, Lithuania, Poland, Russian Federation, Serbia, Ukraine, and others -- is assembled into the compilation. Each country analysis reviews anti- corruption legislation, existing training programmes, and provides detailed case studies from the country. Specific curricula are discussed as are options for countries wishing in adopting best practice from the region. A final chapter will discuss the lessons learned and address wider topics in the formation of anti-corruption training systems in Central and Eastern Europe.
    Keywords: anti corruption training, corruption prevention, public administration
    JEL: A
    Date: 2005–03–16
  10. By: Martin Melecky (School of Economics, University of New South Wales)
    Abstract: According to economic theory, the capital inflows reversal – so-called sudden stop – has a significant negative effect on economic growth. This paper investigates the direct impact of current account reversals on growth in Central and Eastern European countries. Two steps to conduct the analysis are applied. In the first step the standard growth equation is estimated when including the current account reversal impulse dummy. I find that after a current account reversal the growth rate declines by 1.10 percentage points in the current year. The subsequent analysis of the adjustment dynamics builds upon the notion of convergence. The unconditional and conditional convergence coefficients are found to be - 0.47 and -0.52, respectively. This implies that the consequences of the reversal are likely eliminated after 3.3 years when the actual growth rate is back at its equilibrium level, ceteris paribus. Finally, the cumulative loss associated with a sudden stop in capital flows is about 2.3 percentage points. One may infer that Central and Eastern European countries are relatively flexible in terms of adjustment and reallocation of resources given the findings in similar literature examining either a more general sample or concentrating on rather different regions.
    Keywords: Current Account Reversals, Economic Growth, Emerging Market Economies, Adjustment Dynamics, Panel Data
    JEL: F32 C23 O40 O52
    Date: 2005–02–04
  11. By: Lucjan T Orlowski
    Abstract: This project analyzing the development of Polish financial markets sponsored by the USAID grant was aimed at examining selected problems of the banking system and financial markets in Poland. The main criterion for selection of these problems was their potential usefulness for policy-makers at the present stage of the economic transformation. The studies within the project address the issues that require special attention of policy-makers in their efforts to design future stages of the economic transformation and to formulate a program of effective preparations for the EU accession. The topics examined include: the advancement of risk management in the banking system, the economic and legal aspects of capital account liberalization, contagion effects of world financial crises, and sensitivity of financial markets to exchange rate policies. The studies find visible improvements in the methodology of risk management in the banking system in Poland and in the institutional framework of financial markets. It is further suggested that a larger participation of foreign, more xperienced banks would improve efficiency of Poland's financial institutions. It remains debatable whether the banks ought to evolve in the directions of universal or specialized nstitutions. The financial system is prone to contagion effects of external financial crises as documented by the impact of the Asian and the Russian crisis episodes. Several measures aimed at developing an effective cushion against potential contagion effects of financial crisis are proposed. They include: an effective system of bank monitoring and supervision, a lower reliance on debt in relation to equity, a low (less than a multiple of three) ratio of M2 money to foreign exchange reserves, a higher degree of transparency of financial institutions, more transparent fiscal and monetary policies, and a significant increase in national savings. The advancement of capital account liberalization shall not be restrained by taxes on foreign exchange transactions or by similar measures aimed at containing capital flows. Capital controls could be devastating to still very fragile and volatile Polish financial markets.
    JEL: F3 F4
    Date: 2005–02–11
  12. By: Bruno José Marques Pinto (Undergraduate School of Economics, Getulio Vargas Foundation Brazil); Thais Machado de Matos Vilela (Undergraduate School of Economics, Getulio Vargas Foundation Brazil); Ursula Silveira Monteiro de Lima (Undergraduate School of Economics, Getulio Vargas Foundation Brazil)
    Abstract: Fundamental sources of the Russian financial crisis in 1998 are discussed. Focus is made on the time horizon of judgements concerning sustainability of the economic policy. It is argued that the macroeconomic policy pursued by the monetary authorities was not robust in a medium run, but, in the absence of external shocks was far from the crisis area, and required moderate, feasible modifications to be viable in a medium run. After the sharp deterioration in the terms of trade the previously pursued policy was no more sustainable even in a short run. The implications of the crisis were aggravated by the overly optimistic expectations by the monetary authorities of the near-term recovery in the terms of trade.
    Keywords: Russia, Financial Crisis, Crise Cambial
    JEL: F3 F4
    Date: 2005–04–05
  13. By: Ralph de Haas (De Nederlandsche Bank); Ilko Naaborg (University of Groningen)
    Abstract: On the basis of focused interviews with managers of foreign parent banks and their affiliates in Central Europe and the Baltics, we analyse foreign banks’ small business lending and internal capital markets. This allows us to complement the standard empirical literature, which has difficulty in measuring important variables such as lending technologies and capital allocation systems. We find that the acquisition of local banks by foreign banks has not led to a persistent bias in these banks’ credit supply towards large multinational corporations. Instead, increased competition and the improvement of subsidiaries’ lending technologies have led foreign banks to gradually expand into the SME and retail markets. Second, we show that local bank affiliates are strongly influenced by the capital allocation and credit steering mechanisms of the parent bank. The credit growth of subsidiaries therefore potentially depends on the financial health of the foreign based parent bank.
    Keywords: foreign banks, transition economies, small business lending, internal capital markets
    JEL: F23 F36 G21 G31 G32
    Date: 2005–04–11
  14. By: Audra I.Mockaitis (Vilnius Univeristy); Erika Vaiginiene (Vilnius University); Vincent Giedraitis (University of California)
    Abstract: With the enlargement of the European Union, many Central and Eastern European (CEE) manufacturing companies have greater opportunity for internationalizing their activities. Although it is generally held that SMEs have the flexibility and ability to adapt to their environment more quickly than large enterprises, SMEs must be able to use these advantages in internationalizing. This study considers the internationalization efforts of a sample of Lithuanian manufacturing SMEs. Specifically, it is sought to reveal whether any patterns in the foreign market entry decisions of these firms may be found, through an examination of the degree of internationalization and its dependence on company age, size, risk aversion, commitment toward internationalization and knowledge acquisition. It is revealed that as yet, Lithuanian SMEs are in a state of uncertainty, and rely on manufacturing contracts in their home market. A pattern of “no pattern” may best describe their process of internationalization.
    Keywords: internationalization, SMEs, manufacturing sector, Lithuania
    JEL: L14 L21 L6
    Date: 2005–02–03
  15. By: Sebastian Dullien (Financial Times Deutschland)
    Abstract: This paper calculates a unit labor-cost based real effective exchange rate for China for the period 1987-2002. It examines carefully which data sources can be used given the known limitations of Chinese data and constructs to them together with internationally available unit labor cost estimations for a number of industrialized countries, including Korea and Taiwan. It is found that gauged by the ULC measure the increase in manufacturing competitiveness from the late 1980s to the mid 1990s has been even more remarkably than given known industrial-price- based measures for real effective exchange rates suggest. However, since then, Chinese manufacturers have lost more ground than previously thought.
    Keywords: China, international competitiveness, real exchange rate
    JEL: F14 F16
    Date: 2005–02–28
  16. By: Danica Popovic (Faculty of Economics & CLDS)
    Abstract: Both before and after the UN trade embargo (1992-1995), the foreign trade policy of FR Yugoslavia has been highly autarchic. Until the disingegraditon of SFRY this resulted in a significant underperformance of the foreign trade sector, while later this turned out to (almost) a complete halt in regular foreign trading. The key for boosting foreign trade lies in implementing institutional reforms and liberalization of foreign trade, even prior to the start of a credible mass privatization. This would be the only way to avoid creation of unproductive private monopolies and might present a way out of permanent recession of the Serbian economy.
    JEL: F1 F2
    Date: 2005–03–14
  17. By: Danica Popovic (Faculty of Economics & CLDS)
    Abstract: This study is divided in ten sections. The first three sections are devoted to macroeconomic performance of the economy in the 1990s, followed by the analysis of contemporary foreign trade performance and institutions. The overall and dramatic decay starting from 1990 is registered in all topics abovementioned. The next three sections are devoted to foreign trade policies toward imports, exports and domestic competition. A significant improvement in foreign trade policies is registered, but a need for further liberalization is also stressed upon, particularly regarding the abolition of statistical fee, and further reduction and simplification of tariffs. The implementation of safeguards and antidumping policies has not started as yet, mostly for the lack of professional skills in the area. The highly monopolized structures of Yugoslav economy will presumably stay at least while the privatization procedure is not completed in a substantial degree. As far as regulations of entry and domestic competition are concerned, no serious formal impediments can be traced. Since corruption and cronyism are still widespread (not only in foreign trading but in judicary system etc) informal impediments to competing on domestic market are still present. The last three sections are focused on the political economy of trade policy, problems of market access on the EU and other markets.
    JEL: F1 F2
    Date: 2005–03–14
  18. By: Bruno Marques Pinto (Undergraduate School of Economics, Getulio Vargas Foundation Brazil); Thais Vilela (Undergraduate School of Economics, Getulio Vargas Foundation Brazil); Ursula Silveira de Lima (Undergraduate School of Economics, Getulio Vargas Foundation Brazil)
    Abstract: Fundamental sources of the Russian financial crisis in 1998 are discussed. Focus is made on the time horizon of judgements concerning sustainability of the economic policy. It is argued that the macroeconomic policy pursued by the monetary authorities was not robust in a medium run, but, in the absence of external shocks was far from the crisis area, and required moderate, feasible modifications to be viable in a medium run. After the sharp deterioration in the terms of trade the previously pursued policy was no more sustainable even in a short run. The implications of the crisis were aggravated by the overly optimistic expectations by the monetary authorities of the near-term recovery in the terms of trade.
    Keywords: Russia, Financial Crisis, Crise Cambial
    JEL: F1 F2
    Date: 2005–04–05
  19. By: José Caetano (University of Évora); Aurora Galego (University of Évora)
    Abstract: The Eastern enlargement represents an opportunity for trade expansion for all the countries involved. In fact, trade between the EU and the Central Eastern European Countries (CEEC) has grown considerably in the nineties, coinciding with the transition period and the preparation of the CEEC to full-membership. In this paper we analyse the characteristics and evolution of the EU- CEEC trade in the last decade and study the potential bilateral trade flows between the EU and the CEEC. In particular, besides analysing trade relations between CEEC and the EU, we will study trade developments among the CEEC. Moreover, we will take into consideration the sectoral dimension in the analysis. The analysis is based on the gravity model approach using panel data from 1993 to 2001. It is possible to conclude that there is still scope for further expansion of the trade flows between some CEEC and some of the EU countries. Furthermore, there is scope for growth on trade flows among the CEEC, due to the fact that EU membership will promote complete trade liberalisation among these countries.
    Keywords: Trade, EU enlargement, Gravity Models
    JEL: F1 F2
    Date: 2005–04–07
  20. By: Lucjan T Orlowski (Sacred Heart University)
    Abstract: This study examines the link between various monetary policy regimes and the ability to manage inflation and exchange rate risk premiums in the EU candidate countries as they undergo monetary convergence to the eurozone. The underlying hypothesis is that a system of 'flexible inflation targeting' may be an optimal policy choice for managing these two categories of risk. A model of inflation and exchange rate risk premiums within the context of inflation targeting is proposed. Recent trends in these risk premiums in Hungary, the Czech Republic and Poland are tested by using the GARCH(1,1) methodology.
    Keywords: inflation risk premium, exchange rate risk premium, inflation targeting, monetary convergence, transition economies
    JEL: E32 E52 P33
    Date: 2005–01–31
  21. By: Lucjan T Orlowski (Sacred Heart University)
    Abstract: This study views inflation targeting as a viable regime for more advanced transition economies. A dynamic approach to the trajectory of disinflation and the flexibility of direct inflation targeting is presented in the context of achieving monetary convergence to the EU/EMU. The candidate countries are advised to begin from strict inflation targeting and to follow with a more flexible inflation targeting regime before they establish a necessary 'foundational credibility' and monetary stability. These steps, ultimately followed by the euro-peg, are necessary in preparing for accession to the eurozone. The early experiences of the Czech Republic and Poland with inflation targeting are examined.
    JEL: E32 E52 P33
    Date: 2005–01–31
  22. By: Michal Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics)
    Abstract: In this paper we analyse the potential for lending booms in three biggest new EU member states (Czech Republic, Hungary and Poland) during the process of Euro adoption. Experience of old members (Greece, Ireland and Portugal) as well as econometric evidence speak in favour of strong increases in credit in Hungary and Poland and against such an event in the Czech Republic. However, the expected lending booms are smaller than those Ireland and Portugal witnessed recently. We state that, given the current data set, no substantial risk to the banking sectors of the new member states should be expected. We also find that the monetary consequences of these booms for the Euro-area as a whole will be almost negligible.
    Keywords: lending booms, Euro area, banking sector stability, new member states
    JEL: E51 E58 G21
    Date: 2005–02–01
  23. By: Sebastian Dullien (Financial Times Deutschland)
    Abstract: This paper argues that the tradtitional way of gauging a country's fiscal policy stance by looking at government budget deficit or cyclically adjusted budget deficits is misleading in the case of China, since a lot of what usually would be considered fiscal policy is conducted via investment by state owned enterprises. The paper therefore proposes a different indicator for the fiscal policy stance, constructed from government consumption, government expenditure, the state-owned- enterprises' investments and tax revenue. Using this indicator, it can be shown that fiscal policy has been strongly counter-cyclical in China over the past two decades.
    Keywords: Fiscal Policy, China, State-Owned Enterprises, Statistics
    JEL: E62
    Date: 2005–02–28
  24. By: Bruno José Marques Pinto (Graduate School of Economics at Fundacao Getulio Vargas EPGE/FGV); Thais Machado de Matos Vilela (Graduate School of Economics at Fundacao Getulio Vargas EPGE/FGV); Ursula Silveira Monteiro de Lima (Graduate School of Economics at Fundacao Getulio Vargas EPGE/FGV)
    Abstract: Fundamental sources of the Russian financial crisis in 1998 are discussed. Focus is made on the time horizon of judgements concerning sustainability of the economic policy. It is argued that the macroeconomic policy pursued by the monetary authorities was not robust in a medium run, but, in the absence of external shocks was far from the crisis area, and required moderate, feasible modifications to be viable in a medium run. After the sharp deterioration in the terms of trade the previously pursued policy was no more sustainable even in a short run. The implications of the crisis were aggravated by the overly optimistic expectations by the monetary authorities of the near-term recovery in the terms of trade.
    Keywords: Crise Financeira, Crise Cambial, Russia, Russa, Financial Crisis, Currency Crisis
    JEL: E5
    Date: 2005–04–13
  25. By: Haizhi Tong (University of Nebraska); Lilyan E. Fulginiti (University of Nebraska)
    Abstract: A nonstochastic Malmquist Index and a stochastic frontier production function are estimated to examine agricultural productivity growth in Chinese provinces during the 1990’s. Results for both methods indicate high productivity growth in the mid 1990’s with a declining trend thereafter. While the Malmquist index picks up a reversal of this trend in 2000-2001, this is not evident in the stochastic frontier estimates. Both methods identify the same regions as the most productive. Variables representing public inputs such as education, research and infrastructure are shown to have an important impact on differential provincial performance.
    Keywords: Agricultural productivity growth, China, provinces, Malmquist index, stochastic frontier, research and infrastructure
    JEL: Q12 O47 O53
    Date: 2005–02–28
  26. By: El¿bieta Wojnicka (The Gdañsk Institute for Market Economics); Przemys³aw Rot (The Gdañsk Institute for Market Economics); Piotr Tamowicz (The Gdañsk Institute for Market Economics); Tomasz Brodzicki (The Gdañsk Institute for Market Economics)
    Abstract: The concept of an innovation system stresses the role of interaction and co-operation between different agents creating and distributing knowledge and innovation. In the post-communist countries like Poland, most of the institutions similar to those of mature market economies are already established. However they not yet embedded in the economy. That is one of the reasons why co-operation between agents in the Polish innovation system is very weak, which results in a very low level of innovation throughout the entire economy. In 2001, The Gdansk Institute for Market Economy undertook research into the regional innovation system of one of the Polish regions – the Pomeranian Region. The results of the research showed that the majority of firms in the region do not co-operate in the innovation process, especially on the regional level. Horizontal linkages between firms almost do not exist. Firms perceive other firms mainly as competitors and are afraid of co-operation. They believe co-operation leads to the theft of their ideas and precious workers. If co-operation occurs, it concerns only less risky and costly phases of the innovation process like joint development, joint conferences and exhibitions as well as joint marketing strategy. The Pomeranian firms also have very weak linkages to the public scientific sector. They very rarely co-operate with scientific research institutions or technology transfer institutions. The weak interaction between firms, both among themselves and with those in academia, results in a very low overall and especially business R&D expenditure. The Pomeranian region, similar to the entire country, is mainly a user, not a producer of technology. The majority of the firms’ capital is imported from foreign countries. To sustain the long-run competitiveness of industry it is crucial to enhance the R&D activity of Polish firms, preferably basing this on co-operation with other agents of the innovation system. A policy stimulating interactions in the innovation process could be cheaper than a policy establishing new institutions as co-operation steers resources into a single effort and it has multiple effects. An important source of new knowledge might be the exchange of information and ideas during conferences, exhibitions, co-operation of firms in chambers of commerce, etc. However, the majority of Pomeranian firms belong to different firms’ associations on the domestic level. As co-operation on the regional level might be more effective, regional authorities should induce dialogue between firms and other regional agents. In the Strategy of Development of the Region originating in the year 2000, one of the main priorities is building an effective regional innovation system. However, it is important that all the actions undertaken are based on their usefulness for enterprises, which are the most important agents in the RIS.
    Keywords: regional innovation systems, enterprises
    JEL: P Q Z
    Date: 2005–03–11
  27. By: Tine Stanovnik (University of Ljubljana & Institute for Economic Research Ljubljana); Miroslav Verbic (Institute for Economic Research Ljubljana)
    Abstract: This paper analyses the dynamics of wage and income inequality in Slovenia from 1993 to 2002, using two different data sources. The first is obtained by extracting relevant information on wage earners from the personal income tax (PIT) database and the second is obtained using published data on wages and the wage distribution. Analyses of both datasets clearly show a large increase in wage inequality in the period 1993-1995. However, even after 1995 wage inequality has been creeping up. To a large degree, we ascribe the major increase in wage inequality to the rapid development of a full-fledged market economy and also to the changing PIT legislation. A growing individualization of wage contracts doubtlessly also contributed to increased inequality. In addition, our analysis touches upon the effects of the tax system and shows that the tax system significantly moderated the large increases in income inequality.
    Keywords: income distributions, income inequality, Slovenia, transition, wages, wage contracts
    JEL: D33 H24 P20
    Date: 2005–02–07
  28. By: Konstantin Gluschenko (Institute of Economics & Industrial Engineering, Siberian Branch of the Russian Academy of Sciences)
    Abstract: The paper analyzes a spatial pattern of goods market integration in Russia. By the spatial pattern is meant a state of each individual region of the country: whether it is integrated, and if not, whether it moves towards integration. Time series of the cost of the basket of 25 basic foods across 75 regions of Russia for 1994-2000 with monthly frequency are used as the empirical stuff. With the use of nonlinear cointegration relationship that includes asymptotically subsiding trend capturing movement towards integration, 36% of Russian regions are found to be integrated with the national market; 44% of them are non- integrated, but are tending to integration with the national market; and 20% of regions are non-integrated and having no such a trend. It is found that s-convergence of regional prices takes place, implying that, despite the presence of regions not tending to integration, the predominant trend is the improvement in market integration.
    Keywords: market integration, law of one price, price dispersion, convergence, Russian regions
    JEL: C32 P22 R10 R15
    Date: 2005–04–08
  29. By: Belton M Fleisher (Department of Economics, Ohio State University); Haizheng Li (Georgia Tech); Shi Li (Chinese Academy of Social Sciences); Xiaojun Wang (Department of Economics, University of Hawaii at Manoa)
    Abstract: We estimate selection and sorting effects on the evolution of the private return to schooling for college graduates during China’s reform between 1988 and 2002. We find evidence of substantial sorting gains under the traditional system, but gains have diminished and even become negative in the most recent data. We take this as evidence consistent with the growing influence of private financial constraints on decisions to attend college as tuition costs have risen and the relative importance of government subsidies to higher education has declined.
    Keywords: return to schooling, sorting gains, heterogeneity, financial constraints, comparative advantage, China
    JEL: J31 J24 O15
    Date: 2005
  30. By: Jérôme Héricourt (TEAM)
    Abstract: This paper aims at providing better supported results regarding monetary policy transmission in Central and Eastern European countries (CEECs). In the general frame of VAR models, our study differs from previous research in two main respects. Firstly, we provide estimations that do not rely on the hypothesis of cointegration usually exploited in the related literature, but economically meaningless over less than ten years spans and statistically very fragile. Secondly, we present another set of results, relying on real GDP monthly data that have been rebuilt using the Chow and Lin (1971) method; this allows for an alternative to the traditional industrial production data, a partial and highly unstable proxy variable for output. These original methodological insights lead to results emphasizing the general prevalence of exchange rate and domestic credit channels for monetary policy transmission across the studied countries, despite some persistent national specificity. The empirical evidence also incites to be reasonably optimistic regarding the relevancy of a close integration of these countries into euro area.
    Keywords: Monetary policy transmission, VAR models, CEECs
    JEL: E52 E58 F47
    Date: 2005–03
  31. By: Tomáš Holub
    Abstract: This paper discusses the role of foreign exchange interventions in the inflation-targeting regime, focusing on the Czech experience since 1998. It proposes criteria for assessing whether the interventions are consistent with the inflation targeting. While the CNB’s interventions in mid- 1998 and in 2002 pass these criteria easily, the judgement might be more uncertain concerning the interventions in early-1998 and in 1999/2000. It is also stressed that the literature on managed floating usually ignores the difficulty in defining clear procedural rules for the interventions. This contrasts with the procedures guiding the interest rate decisions under the inflation targeting regime, which may occasionally create tensions in the policy regime, as demonstrated by the Czech experience, too. The interventions’ effectiveness in the Czech Republic is also discussed. It seems that sometimes they might have had an immediate impact lasting up to 2 or 3 months, but no strategy can be identified that would work in all episodes. Moreover, even many of the “successful” interventions were not able to prevent quite prolonged periods of exchange rate overvaluation in 1998 and in 2002. It is concluded that the signalling role of foreign exchange interventions is more important than their “market-equilibrating effect”, implying a rather unstable transmission between the central bank actions and the market reactions. Finally, the paper analyses the sterilisation costs, which are shown to have been quite substantial in the Czech Republic. It is argued that the financial sustainability of the interventions is quite important for their credibility and effectiveness.
    Keywords: Exchange rate, foreign exchange interventions, inflation targeting, sterilisation.
    JEL: E42 E44 E52 E58 E65 F31
    Date: 2004–01
  32. By: Martin Čihák
    Abstract: The note is a review of the literature on the quantitative methods used to assess the vulnerabilities of financial systems to risks. In particular, the author focuses on the role of system-wide stress testing. He summarizes the recent developments in the literature, highlighting topics relevant for the Czech case. He presents the key concepts relating to systemwide stress tests, overviews the stress tests performed by central banks and international financial institutions, and discusses conceptual issues relating to modeling of individual risk factors.
    Keywords: Financial soundness, macroprudential analysis, stress tests.
    JEL: G21 G28 E44
    Date: 2004–04
  33. By: Martin Čihák
    Abstract: The note discusses key issues involved in designing a suitable set of stress tests for the Czech banking system. The aim of the note is to propose stress tests that could be used by the Czech National Bank on a regular basis to assess the soundness of domestic banks, both for purposes of macroprudential surveillance and for banking supervision. The author suggests that the exercise be broadly based on the stress tests conducted during the 2001 IMF-World Bank Financial Sector Assessment Program (FSAP) mission to the Czech Republic. He summarizes the FSAP stress tests, and proposes a number of extensions and modifications. The key recommendations are presented in a table that covers also data requirements and a suggested timeframe for implementation. The note includes results of a replication of the Czech FSAP stress tests for mid-2003 data.
    Keywords: Banking system, stress tests.
    JEL: G21 G28 E44
    Date: 2004–04
  34. By: Aleš Bulíř
    Abstract: The paper presents the rationale for spreadsheet-based debt sustainability assessments. Policymakers can use these exercises in two ways. First, assessments of possible debt developments provide “reality checks” of macroeconomic projections. Second, the financial stability exercise may indicate vulnerability to crises. Empirically, using the IMF debt sustainability template, the paper finds that the external position of the Czech Republic appears sustainable under most plausible history-based scenarios. However, a deep, two-year recession coupled with fiscal indiscipline might double the 2002 stock of foreign debt by the end of the decade. The fiscal position is significantly more fragile and the fiscal debt-to-GDP ratio quickly approaches 60 percent under some of the more pronounced shocks.
    Keywords: Debt sustainability, Macroeconomic projections, Vulnerability.
    JEL: F34 H63
    Date: 2004–12
  35. By: David Navrátil; Viktor Kotlán
    Abstract: This paper asks to what extent the market prices in the future monetary policy decisions of the Czech National Bank (CNB), how this policy predictability has evolved over time, and whether the change in the central bank’s forecasting methodology in mid-2002 had any impact. Using a sample up to mid-2004, the results are threefold. First, three-quarters of the CNB’s decisions were in line with medium-term money market expectations. Notwithstanding this relatively high predictability of CNB policy, the average mistake in the expectations was biased upwards: over the entire IT period the market has priced in a higher repo rate than has actually turned out to be the case. Second, our analysis shows that the period in which forecasts with an active monetary policy (unconditional forecasts) have been used is characterized by smaller “surprises” of the money market. On the one hand, this may be connected with a change in the CNB’s communication of the forecast, including releases of verbal comments on the interest rate trajectory that is consistent with the outlook. On the other hand, it may reflect a different economic environment in the second stage of IT in the Czech Republic. Third, we analyze whether there is convergence or divergence between the central bank’s forecast-consistent interest rate trajectory and market forward rates. We show that in most cases market rates converged toward the CNB’s interest rate trajectory after the publication of the forecast.
    Keywords: Financial market reaction, inflation targeting, monetary policy predictability, term structure of interest rates.
    JEL: E43 E44 E52
    Date: 2005–02
  36. By: Vladimír BenáÄek; Ladislav Prokop; Jan Ã. Víšek
    Abstract: Using panel data for 29 industries, we test alternative specifications of Czech export and import functions. The balance of trade is primarily influenced by the real exchange rate, aggregate demand and tariff changes. Reduced growth of the Czech economy after 1996 was an important factor that has kept the balance of trade at a sustainable level in the medium-term, contributing even to the appreciation of the real exchange rate. The secondary fundamental factors, relevant for structural adjustments, a sustainable trade balance and an equilibrium exchange rate, rest, however, on supply-side characteristics such as changes in endowments of physical and human capital, inflows of FDI and growing competitiveness of domestic production. We can argue that appreciation of the real exchange rate is a handicap to Czech exports, especially to exports to non-EU countries. Nevertheless, in the EU case, the appreciation of koruna was countervailed by tariff concessions, improved quality, switchover to commodities with higher contents of value added, gains associated with FDI and growing foreign demand absorption. At the same time, appreciation of the real exchange rate has significantly opened the Czech market to imports but the unconstrained import penetration remained blocked by the growing competitiveness of Czech products in costs, prices and quality.
    Keywords: export and import specialisation; international trade; panel data estimation; production factor intensities; sectoral trade balance.
    JEL: C23 F14 F32
    Date: 2003–06
  37. By: Alexis Derviz
    Abstract: The paper proposes a continuous time model of an FX market organized as a multiple dealership. The model reflects a number of salient features of the Czech koruna spot market. The dealers have costly access to the best available quotes. They interpret signals from the joint dealer-customer order flow and decide upon their own quotes and trades in the inter-dealer market. Each dealer uses the observed order flow to improve the subjective estimates of the relevant aggregate variables, which are the sources of uncertainty. One of the risk factors is the size of the cross-border dealer transactions in the FX market. These uncertainties have diffusion form and are dealt with according to the principles of portfolio optimization in continuous time. The model is used to explain the country, or risk, premium in the uncovered national return parity equation for the koruna/euro exchange rate. The two country premium terms that I identify in excess of the usual covariance term (a consequence of the “Jensen inequality effectâ€) are the dealer heterogeneity-induced inter-dealer market order flow component and the dealer Bayesian learning component. As a result, a “dealer-based total return parity†formula links the exchange rate to both the “fundamental†factors represented by the differential of the national asset returns, and the microstructural factors represented by heterogeneous dealer knowledge of the aggregate order flow and the fundamentals. Evidence on the cross-border order flow dependence of the Czech koruna risk premium, in accordance with the model prediction, is documented.
    Keywords: Bayesian learning, FX microstructure, optimizing dealer, uncovered parity.
    JEL: F31 G11 G29 D49 D82
    Date: 2003–06
  38. By: Aleš Bulíř
    Abstract: The paper investigates empirically the endogenous liquidity nexus of exchange rate determination on a sample of four transition economies. We find evidence in favor of the hypothesis of a nonlinear error correction process vis-a-vis longer-term trend deviations. The results suggest that early and successful exchange-rate market and financial-account liberalization pays off in terms of depth of the market and, hence, faster adjustment of national currencies to short-term shocks to the exchange rate.
    Keywords: Exchange rate, endogenous liquidity, error-correction mechanism, nonlinearity.
    JEL: F31 F33 C32
    Date: 2003–06
  39. By: Alexis Derviz
    Abstract: The paper investigates the transmission of macroeconomic factors into the price-setting behavior of a specific dealer in the FX market. This problem is viewed from the perspective of a central banker who observes the price evolution but does not make the market in the home currency. The central banker’s task is to explain the forex behavior in terms of conventional economic logic. The analysis is based on a model of a multiple dealer market under two organizations - direct inter-dealer and brokered. The model is constructed in such a way as to reflect the most prominent features of the market for the Czech koruna and, accordingly, to address some issues of key relevance to the Czech National Bank’s exchange rate policy. We show that the totality of the exchange rate-relevant fundamental factors influence the market maker’s behavior through a single sufficient statistic, his “marginal†valuation of foreign currency holdings. Under the two studied trading mechanisms, the marginal valuations across market participants determine the equilibrium exchange rate by means of different trade patterns. Specifically, the brokered market is inferior to the direct one in terms of welfare improvement through trade. It takes a higher inter-dealer trade volume in the brokered market to absorb a new price impulse. Therefore, the central banker would do best by monitoring the brokered segment (as the only partially transparent one available), but by conducting interventions in the direct segment, where the desired impact is easier to achieve.
    Keywords: forex microstructure, multiple dealership, order flow, pricing schedule.
    JEL: F31 G15 C72
    Date: 2003–06
  40. By: Vladimír Bezděk; Kamil Dybczak; Aleš Krejdl
    Abstract: What is the size of quasi-fiscal operations and their impact on the overall fiscal balance and public debt in the Czech Republic? Is the recent increase in Czech fiscal deficits fully attributable to the business cycle, or are there non-cyclical factors in place? And last but not least, what are the long-term perspectives of the fiscal system given the size and speed of the expected population ageing process? These are the issues dealt with in the paper. Our results, although being surrounded by some margin of uncertainty, are quite cautionary. The transparency of the fiscal accounts seems to be insufficient and the size of off-budget operations is not negligible. Moreover, we have been witnessing a rapid increase in the cyclically-adjusted deficits, and Czech fiscal policy exhibits mainly pro-cyclical features. Looking into the more distant future reveals that our current fiscal system is extremely vulnerable to demographic pressures, even by international comparison. We argue that the fiscal authorities should increase the overall transparency of the fiscal accounts, mitigate the pro-cyclical characteristics of fiscal policy and make the whole fiscal system more resistant to the expected demographic pressures.
    Keywords: ageing populations, cyclically-adjusted balance, fiscal policy, fiscal stance, offbudget transactions, quasi-fiscal policy.
    JEL: E62 H11 H5 H6 H81
    Date: 2003–11
  41. By: Tomáš Holub; Martin Čihák
    Abstract: The paper provides a theoretical reference point for discussions on adjustments in price levels and relative prices. The authors present a “nested†model integrating the Balassa–Samuelson model of the real equilibrium exchange rate with a model of accumulation of capital and with the demand side of the economy. Consequently, they show how the model can be generalised to a case of numerous commodities with different degrees of tradability. The predictions of the model are generally consistent with empirical findings for Central and Eastern European countries. The authors show how the theoretical model can be used for internally consistent simulations of the future convergence process in a transition economy.
    Keywords: Balassa–Samuelson model, inflation, relative prices.
    JEL: E31 E52 E58 F15 P22
    Date: 2003–12
  42. By: Alexis Derviz; Narcisa KadlÄáková; Lucie Kobzová
    Abstract: This paper analyses the impact of different credit risk-based capital requirement implementations on banks’ need for capital. The capital requirements for an artificially constructed risky loan portfolio are calculated by applying the BIS approach, the two widespread commercial risk-measurement models, CreditMetrics and CreditRisk+, and, finally, an original synthetic model similar to KMV. In the first three cases we closely follow the methodologies proposed by the regulatory or credit risk models. Economic capital requirements for the latter are obtained by means of Monte Carlo simulations. In the context of CreditMetrics, we additionally perform a Monte Carlo-based stress testing of the monetary policy changes reflected in the term structure of interest rates. Our model of KMV type combines the elements of the structural and the reduced-form methods of risky debt pricing, and the possibilities of its numerical solution are outlined.
    Keywords: credit risk, economic capital, market risk, New Basel Capital Accord, systemic uncertainty.
    JEL: G21 G28 G33
    Date: 2003–12
  43. By: Luboš Komárek; Zdeněk Čech; Roman Horváth
    Abstract: In this paper we provide a survey of the optimum currency area theory, estimate the degree of the explanatory power of the optimum currency area criteria, and also calculate the optimum currency area index in the case of the Czech Republic. The results indicate that the traditional optimum currency area criteria to certain extent explain exchange rate variability. Our results may be interpreted as an attempt to assess the benefit-cost ratio of implementing a common currency for a pair of countries. Our results also suggest that from the point of view of the optimum currency area theory the costs of adopting the euro for the Czech Republic may be relatively low, at least in comparison with other EMU member countries. We conclude that if the European Monetary Union is sustainable, the accession of the Czech Republic should not change it.
    Keywords: Convergence, EU/eurozone, exchange rate, optimum currency area theory, transition.
    JEL: E58 E52 F42 F33
    Date: 2003–12
  44. By: Luboš Komárek; Zdeněk Čech, Roman Horváth
    Abstract: With EU accession looming, a new chapter has been opened in the debate about the candidate countries’ exchange rate strategies. A heated discussion has arisen in relation to ERM2 membership. The experience of the present eurozone members with ERM/ERM2 membership shows that none of them faced a significant challenge in the two-year “evaluation†period in terms of the exchange rate stability convergence criterion. This could also be attributable to the stability policies prescribed by the Maastricht Treaty. However, for catching-up countries in the run-up to joining the eurozone, given the existing functioning of the mechanism, the ERM2 appears be of little help for ensuring exchange rate stability. The mechanism should be viewed rather as a tool for “persuading†the markets of the appropriateness of the euro-locking rate. Since the Maastricht rules do not allow downward adjustment of the central parity within the ERM2 for two years before introduction of the euro, the authorities should be familiar with the preferred real exchange rate path prior to entering the mechanism. We conclude that countries could face large costs if they fail to do so.
    Keywords: EU/eurozone, convergence, exchange rate, transition.
    JEL: E58 E52 E32 F42 F33
    Date: 2003–12
  45. By: Tibor Hlédik
    Abstract: Since the introduction of inflation targeting in the Czech Republic in 1998, supply-side factors have had a strong direct influence on CPI inflation on several occasions. This paper uses a small-scale dynamic rational expectations model based on an open-economy version of Fuhrer– Moore-type staggered wage setting to quantify the second-round effects of selected supply-side shocks and of shocks to the nominal exchange rate on wages and subsequently on inflation. In order to analyse the desired reaction of the central bank to these shocks, optimal time-consistent policy rules are derived within the presented New-Keynesian framework. Impulse response analyses are then carried out to demonstrate the model’s dynamics under various policy rules corresponding to different loss functions of the central bank. The conclusions presented in the paper suggest that the second-round effects of shocks to import prices and the nominal exchange rate on inflation should not be ignored in practical policy-making.
    Keywords: monetary policy, optimal policy rules, inflation targeting.
    JEL: E52 E31 F41
    Date: 2003–12
  46. By: Alexis Derviz; Jiří Podpiera
    Abstract: In this paper we investigate the determinants of the movements in the long-term Standard & Poors and CAMELS bank ratings in the Czech Republic during the period when the three biggest banks, representing approximately 60% of the Czech banking sector’s total assets, were privatized (i.e., the time span 1998–2001). The same list of explanatory variables corresponding to the CAMELS rating inputs employed by the Czech National Bank’s banking sector regulators was examined for both ratings in order to select significant predictors among them. We employed an ordered response logit model to analyze the monthly long-run S&P rating and a panel data framework for the analysis of the quarterly CAMELS rating. The predictors for which we found significant explanatory power are: Capital Adequacy, Credit Spread, the ratio of Total Loans to Total Assets, and the Total Asset Value at Risk. Models based on these predictors exhibited a predictive accuracy of 70%. Additionally, we found that the verified variables satisfactorily predict the S&P rating one month ahead.
    Keywords: Bank rating, CAMELS, ordered logit model, panel data analysis.
    JEL: C53 E58 G21 G33
    Date: 2004–01
  47. By: Ian Babetskii
    Abstract: There are two opposite points of view on the link between economic integration and business cycle synchronization. De Grauwe (1997) classifies these competing views as “The European Commission View†and “The Krugman Viewâ€. According to the European Commission (1990), closer integration leads to less frequent asymmetric shocks and to more synchronized business cycles between countries. On the other hand, for Krugman (1993) closer integration implies higher specialization and, thus, higher risks of idiosyncratic shocks. Drawing on the evidence from a group of transition countries which have experienced a notable increase in trade openness and economic integration with the European Union during the past decade, this paper tries to determine whose argument is supported by the data. This is done by confronting estimated time-varying coefficients of supply and demand shock asymmetry with indicators of trade intensity and exchange rates. We find that (i) an increase in trade intensity leads to higher symmetry of demand shocks; the effect of integration on supply shock asymmetry varies from country to country; (ii) a decrease in exchange rate volatility has a positive effect on demand shock convergence. The results for demand shocks can be interpreted in favor of “The European Commission Viewâ€, also known as the endogeneity argument by Frankel and Rose (1998) in the OCA criteria discussion, according to which trade links reduce asymmetries between countries. Overall, our results support Kenen’s (2001) argument that the impact of trade integration on shock asymmetry depends on the type of shock.
    Keywords: EU enlargement, business cycle, trade, OCA (optimal currency area)
    JEL: E32 F30 F42
    Date: 2004–03
  48. By: Anca Pruteanu
    Abstract: With this work, we aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996–2001, we study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market’s supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. We find that changes in monetary policy alter the growth rate of loans with considerably stronger magnitude in the period 1999–2001 than in the period 1996–1998. From the analysis intended to capture the characteristics of the supply of loans, we conclude that the lending channel was operative in the period 1996–1998: we find cross-sectional differences in the lending reactions to monetary policy shocks due to degree of capitalization and liquidity. For the subsequent period 1999– 2001, the results also show distributive effects of monetary policy due to bank size and a bank’s proportion of classified loans. In the context of steadily decreasing interest rates, this bolsters the supposition of credit rationing and hence that of an operative broad credit channel. At the same time, we find evidence of linear relationships between bank characteristics and the growth rate of loans, and again these relationships change between the two time periods. This bodes well with the changes in the structure and attitude towards lending of the Czech commercial banks.
    Keywords: Bank lending channel, broad credit channel, credit rationing, monetary transmission mechanism.
    JEL: E52 E51 E58 G21
    Date: 2004–04
  49. By: Jiří Podpiera
    Abstract: In this paper we propose an alternative method for deriving the business cycle. We interpret the varying inflationary responses to a constant demand shock in a partial equilibrium model. An above-average inflationary response indicates a boom phase and a below-average response shows an economic slowdown. Our model uses data for prices and household budget shares which are not subject to revisions and are consistent with the inflation measure. Hence, it mitigates the common drawbacks of usually applied techniques, such as real-time data mismeasurement or end-point bias of univariate filters. It follows that the results are altered neither by GDP data revisions, labor share determination and NAIRU estimation and total productivity smoothing, nor by the end-point bias of data filtering. The proposed method is thus preferred to other complementary methods such as GDP series filtering or the production function approach in showing truly the inflation environment. It is applied to the Czech quarterly data during 1994- 2003 and compared to other available business cycle estimates for the Czech economy. Comparing our business cycle estimation method with the production function method, used by the Economic Intelligence Unit and the Czech Ministry of Finance, and the Kalman filter, used by the Czech National Bank, we found the highest correlation between our measure and the Economic Intelligence Unit’s indicator.
    Keywords: Business cycle, inflation environment, simultaneous model.
    JEL: E31 E32 E37 C30
    Date: 2004–05
  50. By: Petr Král
    Abstract: The main goal of the paper is to obtain quantitative evidence describing determinants of FDI in the case of the Czech economy in order to empirically support the decision-making process within the Czech National Bank. The paper builds on the recent economic literature and at the same time examines FDI inflows from the perspective of a multinational company. Furthermore, the microeconomic and macroeconomic characteristics of a potential host country which are crucial for multinational companies’ investment decisions are examined. Since government investment incentives seem to play a role in attracting foreign direct investors the paper provides some details on the Czech economic environment regarding this issue. To reach those objectives a cointegration analysis and error-correction model is used to identify the most important determinants of FDI inflows in the Czech Republic by developing an econometric model for analytic purposes. The empirical results presented in the paper support the hypothesis that the most significant determinants of FDI inflow into the Czech economy correspond to the theoretically considered and empirically tested factors. The paper, therefore, provides some basis for analysing the character of foreign investment and assessing the role of the government in attracting FDI inflows to the Czech Republic. More specifically, the empirical results suggest that establishing and maintaining macroeconomic stability and external equilibrium, offering a consistent and competitive package of investment incentives and promotion, and an efficient financing infrastructure, public governance regime and social system are the key factors promoting foreign direct investment inflows.
    Keywords: Determinants, empirical analysis, foreign direct investment, incentives
    JEL: F21 F23 C22
    Date: 2004–06
  51. By: Narcisa KadlÄáková; Joerg Keplinger
    Abstract: This project undertakes an empirical analysis in credit risk modeling using a data sample representative of bank lending to the Czech corporate sector. A rating system is constructed using a proprietary database (Creditreform) that provides a solvency index for a large number of Czech firms. Several methods for the calibration and validation of a rating system are described and tested in practice. On the basis of a representative portfolio for Czech industries, systemic predictions of regulatory and economic capital are obtained and compared. The methodologies formulated by the latest Consultative Document of the NBCA (April 2003) and by the Credit Metrics and CreditRisk+ models are applied. The main contributions of this project can be briefly summarized as follows, (a) it shows in an applied manner that input data problems in credit risk modeling can be overcome, (b) it sheds light on regulatory issues that are gaining increasing relevance, and (c) it outlines the most important features of two credit risk models.
    Keywords: Credit Risk, Economic Capital, Exchange Rate Exposure, Rating System.
    JEL: G21 G28 G23
    Date: 2004–06
  52. By: Jaromír Beneš; David Vávra
    Abstract: We follow a Beveridge-Nelson like time series decomposition method (into trend, business cycle and irregular components), and examine a stylized model of price inflation determination using the Czech data. We characterize the estimated components of CPI, IPPI and import inflations, together with the real production wage and real output, and survey their basic correlation properties; furthermore we compute structural innovations imposing restrictions on their long-run effects, draw the impulse responses, and test the results by means of bootstrap simulation. We conclude that major room for further refinement of the research is found in two areas, First, from an economist’s perspective, in the construction of real marginal cost indicators, and second, from a statistiacian’s perspective, in further investigation of the robustness of the method.
    Keywords: bootstrap, business cycle, inflation, structural VAR, time series decomposition
    JEL: C32 E32
    Date: 2004–12
  53. By: Martin Cincibuch; Jiri Podpiera
    Abstract: Using the simple arbitrage model, we decompose real appreciation in tradables in three Central European countries between the pricing-to-market component (disparity) and the local relative price component (substitution ratio). Appreciation is only partially explained by local relative prices. The rest is absorbed by disparity, depending on the size of the no-arbitrage band. The observed disparity fluctuates in a wider band for differentiated products than for a commodity like goods.
    Keywords: Purchasing power parity, pricing-to-market, transition, real appreciation, exchange rates
    JEL: F12 F15
    Date: 2004–12
  54. By: Aleš Bulíř; Kateřina Šmídková
    Abstract: Estimation and simulation of sustainable real exchange rates in some of the new EU accession countries point to potential difficulties in sustaining the ERM2 regime if entered too soon and with weak policies. According to the estimates, the Czech, Hungarian, and Polish currencies were overvalued in 2003. Simulations, conditional on large-model macroeconomic projections, suggest that under current policies those currencies would be unlikely to stay within the ERM2 stability corridor during 2004-2010. In-sample simulations for Greece, Portugal, and Spain indicate both a much smaller misalignment of national currencies prior to ERM2, and a more stable path of real exchange rates over the medium term than can be expected for the new accession countries.
    Keywords: ERM2, Foreign direct investment, Sustainable real exchange rates.
    JEL: F31 F33 F36 F47
    Date: 2004–12
  55. By: Jaleel Ahmad (Economics, Massachusetts Institute of Technology, Montreal, Canada); Jing Yang (Economics, Concordia University, Ottawa, Canada)
    Abstract: This paper investigates whether a J-curve can be detected in the time series data on China's bilateral trade with the G-7 countries. It utilizes cointegration and causality tests to ascertain the long-run relatedness, and the short-run dynamics, between the real exchange rate, national income, and the trade balance. There is some evidence that a real depreciation eventually improves the trade balance with some countries. But there is no indication of a negative short-run response which characteristics the J-Curve.
    Date: 2004–03
  56. By: Tianshu Chu; Thomas J. Prusa (Economics Study Area, East-West Center)
    Abstract: An earlier draft of this paper was presented at the APEC Capacity-Building Workshop on Quantification of NTMs and Trade Facilitation, October 8-10, 2003, in Bangkok, Thailand.
    Date: 2004–04
  57. By: Can Huang; Celeste Amorim; Joaquim Borges Gouveia (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro); Mark Spinoglio; Augusto Medina (Sociedade Portuguesa de Inovação)
    Abstract: The paper first identifies the stakeholders involved in the design and implementation of China’s innovation policy and compares them with different government systems in selected Organization for Economic Co-operation and Development (OECD) countries. In order to disclose the relative strength and weaknesses inside China’s innovation policy framework, we proceed to utilize policy practices in the OECD countries as a guideline to examine China's innovation policy in five categories: reform in the public S&T institutions, financial policy, business innovation support structure, human resource policy and legislative actions. Subsequently, several weak components of the Chinese innovation policy framework are identified and two of them are selected for further analysis: education and human resource policy, and protection of Intellectual Property Rights (IPR). Finally, the paper provides some priorities and possible actions for future innovation policy developments in China.
    Date: 2004

This nep-tra issue is ©2005 by Toño Sanchez. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.