nep-tra New Economics Papers
on Transition Economics
Issue of 2008‒11‒11
25 papers chosen by
J. David Brown
Heriot-Watt University

  1. The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe By Karsten Staehr
  2. Industrial Agglomeration and Wage Inequality in China By Li, Yao
  3. Corporate Interest Rates and the Financial Accelerator in the Czech Republic By Fidrmuc , Jarko; Horváth, Roman; Horváthová, Eva
  4. The Introduction of the Euro in Central and Eastern European Countries - Is it Economically Justifiable? By Tanja Broz
  5. How Dependent is the Chinese Economy on Exports and in What Sense has its Growth been Export-led? By Dong He; Wenlang Zhang
  6. How China's farmers adapt to climate change By Wang, Jinxia; Mendelsohn, Robert; Dinar, Ariel; Huang, Jikun
  7. The Effect of Inflation on Growth: Evidence from a Panel of Transition Countries By Gillman, Max; Harris, Mark N.
  8. Does international openness affect productivity of local firms? Evidence from Southeastern Europe By Jože P. Damijan; Jose de Sousa; Olivier Lamotte
  9. The impact of innovation on employment: firm- and industry-level evidence from Estonia By Jaanika Meriküll
  10. Impact of Firm Heterogeneity on Direct and Spillover Effects of FDI: Micro Evidence from Ten Transition Countries By Jože P. Damijan; Matija Rojec; Boris Majcen; Mark Knell
  11. Temporary and Persistent Poverty among Ethnic Minorities and the Majority in Rural China By Gustafsson, Björn; Sai, Ding
  12. Banking and Finance in South - Eastern Europe: The Albanian Case By Kliti Ceca; Kelmend Rexha; Elsida Orhan
  13. Political alternation as a restraint on investing in influence : evidence from the post-communist transition By Milanovic, Branko; Hoff, Karla; Horowitz, Shale
  14. Assessing the Role of Technology Adoption in China's Growth Performance. By Nadja Wirz
  15. Tax and Pension Reform in the Czech Republic-Implications for Growth and Debt Sustainability By Anita Tuladhar; Dennis P. J. Botman
  16. Government Spending on Health Care and Education in Croatia: Efficiency and Reform Options By Etibar Jafarov; Victoria Gunnarsson
  17. What drives the Unemployment Rate in Poland. By Strawinski, Pawel
  18. Determinants of Pollution Abatement and Control Expenditure: Evidence from Romania By Sova, Ana Maria; Sova, Robert; Rault, Christophe; Caporale, Guglielmo Maria
  19. Fertility of migrants: a comparative study between Italy and Russia By Eleonora Mussino; Alyson van Raalte
  20. ECONOMIC GROWTH AND GROWTH LINKAGES IN CHINA 1994-2003 By Ari, Kokko; Ljungwall, Christer; Gustavsson Tingvall, Patrik
  21. Taxation and capital structure : evidence from a transition economy By Klapper, Leora; Tzioumis, Konstantinos
  22. On the Bilateral Trade Effects of Free Trade Agreements between the EU-15 and the CEEC-4 Countries By Rault, Christophe; Caporale, Guglielmo Maria; Sova, Ana Maria; Sova, Robert
  23. Why is Chinese Regional Output Diverging? By Westerlund, Joakim; Edgerton, David
  24. A Fresh Scrutiny on Openness and Per Capita Income Spillovers in Chinese Cities: A Spatial Econometric Perspective By Sélin Ozyurt
  25. Institutions Matter: Financial Supervision Architecture, Central Bank and Path Dependence. General Trends and the South Eastern European Countries By Donato Masciandaro; Marc Quintyn

  1. By: Karsten Staehr
    Abstract: This paper discusses the prospects of the new EU members from Central and Eastern Europe joining the European Economic and Monetary Union in the short and medium term. The countries must attain and sustain inflation rates sufficiently low to abide by the Maastricht inflation criterion, but this is complicated by the process of real convergence exerting upward pressure on the inflation rate. The paper discusses different strategies which the new EU countries can apply. It is argued that no one-size-fits-all policy is available and that some countries might be better off postponing EMU membership in pursuit of other goals. Still, the special circumstances concerning the Central and Eastern European EU countries suggest that the process of admission of new countries to the EMU should be adaptive and pragmatic
    Keywords: Monetary Union, inflation, Maastricht inflation criterion, CEE
    JEL: E31 E61
    Date: 2008–10–30
  2. By: Li, Yao
    Abstract: This paper estimates nonlinear structural wage equations derived from NEG model with data on 327 cities in China. The estimation results show that the variation of wage level across cities in China is associated with proximity to large markets. The estimated elasticity of substitution of China is smaller than those of the other countries studied in previous research. It indicates that with the same increase of sub-regional market size, China may suffer more serious regional inequality problems. My estimation shows that although increased agglomeration can increase each city’s wage level, it may also increase the wage gap between large and small cities.
    Keywords: New Economic Geography; Wage Inequality; Elasticity of Substitution
    JEL: O24 F12 R12
    Date: 2008–05
  3. By: Fidrmuc , Jarko; Horváth, Roman; Horváthová, Eva
    Abstract: We analyze the determinants of the corporate interest rates and the financial accelerator in the Czech Republic. Using a unique panel of 448 Czech firms from 1996 to 2002, we find that selected balance sheet indicators influence significantly the firm-specific interest rates. In particular, debt structure and cash flow have significant effects on interest rates, while indicators on collateral play no significant role. We find evidence that monetary policy has stronger effects on smaller firms than on medium and larger firms. Finally, we find no asymmetric effects in the monetary policy over the business cycle.
    Keywords: Monetary policy transmission; balance sheet channel; financial accelerator; corporate interest rates.
    JEL: E43 E32 G32
    Date: 2008–11–05
  4. By: Tanja Broz (The Institute of Economics, Zagreb)
    Abstract: This paper aims to analyse the correlation of demand and supply shocks between the EMU and CEECs in order to examine whether there is some degree of business cycle coordination between them. The main objective is to investigate the impact on Croatia and compare it with other CEECs. Croatia is of interest in this paper since there is a lack of empirical studies on this topic which include Croatia in the sample. Information on the correlation of demand and supply shocks between the EMU and CEECs is important if a country wants to introduce the euro since the synchronisation of business cycles and policy coordination will have a significant impact on willingness to enter the monetary union (except if the decision is a political one). Since Croatia has started its path towards the EU, it should be expected that it will introduce the euro, since there is no opt-out clause for new members. In order to gather results, supply and demand shocks are extracted from data using Blanchard and Quah (1989) methodoogy and then the correlations of shocks between the EMU and CEECs are calculated as well as the size of shocks and the speed of adjustments. Results indicate that Croatia is, at the moment, far from being ready for the common monetary policy with the EMU; while other CEE countries such as Slovenia and Latvia, which in fact first applied for the introduction of euro, have the closest correlation of their business cycles with those of the EMU.
    Keywords: supply and demand shocks, European Monetary Union, Central and Eastern European countries
    JEL: E32 E42 F33
    Date: 2008–10
  5. By: Dong He (Research Department, Hong Kong Monetary Authority); Wenlang Zhang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper studies the interaction between foreign trade and domestic demand and supply in China¡¦s economic transformation. It compares China¡¦s export dependency with other economies using input-output analysis. The paper also conducts econometric analysis of provincial level data to examine causality between the growth of foreign trade and different components of domestic demand, and causality between the growth of foreign trade and total factor productivity. The main message is that China¡¦s export dependency is significantly lower than commonly thought. Moreover, the contribution of export to economic growth in China came mainly from its impact on total factor productivity growth from a supply perspective rather than its multiplier effect from a demand perspective. This relationship was found to be stronger in the more developed coastal areas than in the less developed inland areas.
    Keywords: Export-led growth; Export dependency; Input-output analysis; Malmquist index
    JEL: F13 O11 O43
    Date: 2008–10
  6. By: Wang, Jinxia; Mendelsohn, Robert; Dinar, Ariel; Huang, Jikun
    Abstract: This paper uses a cross sectional method to analyze irrigation choice and crop choice across 8,405 farmers in 28 provinces in China. The findings show that Chinese farmers are more likely to irrigate when facing lower temperatures and less precipitation. Farmers in warmer places are more likely to choose oil crops, maize, and especially cotton and wheat, and are less likely to choose vegetables, potatoes, sugar, and especially rice and soybeans. In wetter locations, farmers are more likely to choose soybeans, oil crops, sugar, vegetables, cotton, and especially rice, and they are less likely to choose potatoes, wheat, and especially maize. The analysis of how Chinese farmers have adapted to current climate, provides insight into how they will likely adapt when climate changes. Future climate scenarios will cause farmers in China to want to reduce irrigation and shift toward oil crops, wheat, and especially cotton. In turn, farmers will shift away from potatoes, rice, vegetables, and soybeans. However, adaptation will likely vary greatly from region to region. Policy makers should anticipate that adaptation is important, that the magnitude of changes depends on the climate scenario, andthat the desired changes depend on the location of each farm.
    Keywords: Crops&Crop Management Systems,Climate Change,Rural Poverty Reduction,Common Property Resource Development,Agriculture&Farming Systems
    Date: 2008–10–01
  7. By: Gillman, Max (Cardiff Business School); Harris, Mark N.
    Abstract: The paper examines the effect of inflation on growth in transition countries. It presents panel data evidence for 13 transition countries over the 1990-2003 period; it uses a fixed effects, full-information maximum likelihood, panel approach to account for possible bias from correlations among the unobserved effects and the observed country heterogeniety. The results find a strong, robust, negative effect of inflation on growth, and one that declines in magnitude as the inflation rate increases. These results include a role for a normalized money demand, by itself and as part of a nonlinearity in the inflation-growth effect. And these results derive from both a baseline single equation model and one that is then expanded into a three equation simultaneous system. This allows for possible simultaneity bias in the baseline model.
    Keywords: Growth; transition; panel data; inflation; money demand; endogeneity
    JEL: C23 E44 O16 O42
    Date: 2008–10
  8. By: Jože P. Damijan; Jose de Sousa; Olivier Lamotte
    Keywords: international trade, trade liberalization, foreign ownership, total factor productivity, transition economics
    JEL: F14 D24 L25
    Date: 2008
  9. By: Jaanika Meriküll
    Abstract: This paper investigates the implication of innovation on employment at the firm and industry levels. The paper contributes to the literature in two respects. First, it proceeds from the data of a catch-up country undergoing a very rapid economic development. Most of the empirical investigations use data from developed and technologically leading countries. The second contribution concerns the nature of the data in use; we develop a unique database merging the data of the Estonian Commercial Register with two consecutive Estonian Community Innovation Surveys (CIS), the CISIII for 1998-2000 and CISIV for 2002-2004. Our results coincide with the results on developed economies in the respect that innovation activity has a positive effect on employment and that product innovation has a stronger and a more positive employment effect. Both of these effects are consistent over firm and industry levels. This result is also confirmed by the insignificance of the spillover effects of an industry\'s innovation on employment by firms
    Keywords: innovation (technological change), employment, catch-up economy
    JEL: J23 O33 D21
    Date: 2008–10–30
  10. By: Jože P. Damijan; Matija Rojec; Boris Majcen; Mark Knell
    Abstract: This paper presents a comparative study of the importance of direct technology transfer and spillovers through FDI on a set of ten transition countries, using a common methodology and appropriate methods to account for selection and simultaneity correction. This paper considers by far the largest firm level dataset (more than 90,000 firms) used by any study on the spillover effects of FDI. The main novelty of the paper is the explicit control for various sources of firm heterogeneity when accounting for different effects of FDI on firm performance. Controlling for these variables leads to some interesting results which contrast with the previous empirical work in the field. We find that horizontal spillovers have become increasingly important over the last decade, and they may even become more important than vertical spillovers. Furthermore, this work shows that the heterogeneity of firms in terms of absorptive capacity, size, productivity and technology levels affect the results. These findings suggest that both direct effects from foreign ownership as well as the spillovers from foreign firms substantially depend on the absorptive capacity and productivity level of individual firms. Only more productive firms and firms with higher absorptive capacities are able to both compete with foreign affiliates in the same sector and benefit from the increased upstream demand for intermediates generated by foreign affiliates. In addition, these results show that foreign presence may also affect smaller firms to a larger extent than larger firms, but this impact may be in either direction.
    Keywords: Foreign direct investment, technology transfer, spillovers, transition economies, firm heterogeneity
    JEL: D24 F14
    Date: 2008
  11. By: Gustafsson, Björn (Göteborg University); Sai, Ding (Chinese Academy of Social Sciences)
    Abstract: Poverty among ethnic minorities and the majority in rural China for the years 2000, 2001 and 2002 is investigated taking a dynamic view and using a large sample covering 22 provinces. Based on the National Bureau of Statistics' low income line, almost one-third of the ethnic minorities experienced poverty during the three years studied while the corresponding proportion among the ethnic majority was only about half as high. Still, by far most of the poor in rural China belong to the ethnic majority. The relatively high poverty rates for ethnic minorities in rural China are found to be due to higher rates of entry than for the majority, while differences in exit rates across ethnicities are few. To a large extent, ethnic poverty differences can be attributed to differences in location together with temporary and persistent poverty in rural China having a very clear spatial character. Poverty is concentrated to the western region and villages with low average income. Determinants of persistent and temporary poverty in rural China differ due to location as well as household characteristics.
    Keywords: China, poverty, ethnic minorities
    JEL: I32 J15
    Date: 2008–10
  12. By: Kliti Ceca (Bank of Albania); Kelmend Rexha (Bank of Albania); Elsida Orhan (Bank of Albania)
    Abstract: This paper aims to present the main developments of banking and finance in Albania in a historical perspective. This historical overview might help to better understand not only the great difficulties and obstacles the country faced in the past but also the successes it achieved. It is widely known that the financial system, especially the banking sector, is considered as very important as it serves as a catalyst for the economic development of the country. And this is because financial depth determines economic growth. The paper also highlights the future challenges that the Albanian financial system will face within the context of the country’s European integration and the EU harmonization of the financial policies.
    Keywords: Historical perspectives; Financial system; Bank-dominated system; Panics; EU integration
    JEL: G21 G22 N24
    Date: 2008–07
  13. By: Milanovic, Branko; Hoff, Karla; Horowitz, Shale
    Abstract: The authors develop and implement a method for measuring the frequency of changes in power among distinct leaders and ideologically distinct parties that is comparable across political systems. The authors find that more frequent alternation in power is associated with the emergence of better governance in post communist countries. The results are consistent with the hypothesis that firms seek durable protection from the state, which implies that expected political alternation is relevant to the decision whether to invest in influence with the governing party or, alternatively, to demand institutions that apply predictable rules, with equality of treatment, regardless of the party in power.
    Keywords: National Governance,Governance Indicators,Public Sector Corruption&Anticorruption Measures,Parliamentary Government,Emerging Markets
    Date: 2008–10–01
  14. By: Nadja Wirz (University of St. Gallen, Switzerland)
    Abstract: China has experienced a period of tremendous economic growth in recent years. In an attempt to explain this development, several existing growth-accounting studies reveal that impressively high rates of productivity growth have been at the heart of China's performance. This study investigates to what extent these productivity increases can be explained by technology-adoption theory. In less developed countries, the key element behind technological progress is technology adoption, the process of copying technological knowledge invented throughout the world. To uncover a measure of China's technological advances, the paper constructs a hybrid of some prominent technology-adoption models and calibrates it to reasonable parameter values. The calibrated version of the model is then combined with Chinese economic data. For the period 1978-2005, the analysis finds that the Chinese performance can be explained to a surprisingly large extent by the suggested technology-adoption framework. It can account for roughly 80% of China's productivity gains.
    Keywords: technological progress; technology adoption; TFP; China
    JEL: O11 O30 O40 O52
    Date: 2008–10
  15. By: Anita Tuladhar; Dennis P. J. Botman
    Abstract: The Czech Republic has embarked on an ambitious tax reform and expenditure package to bring the deficit sustainably below 3 percent, and intends to reduce the deficit to 1 percent of GDP by 2012. To address the long-term fiscal challenge due to population aging, pension reform proposals are also being considered. In this paper we assess the macroeconomic effects of these measures using the Global Fiscal Model. The tax reform package will achieve a more efficient tax system. If implemented successfully with the intended expenditure savings measures, debt is projected to improve markedly while output would expand. Fiscal sustainability will not be restored, however, even if further measures to bring the deficit to 1 percent of GDP by 2012. Instead, raising the retirement age and prefunding future aging costs would be needed to keep debt below 60 percent of GDP through 2050.
    Keywords: Czech Republic , Tax reforms , Fiscal policy , Budget deficits , Aging , Population , Pensions , Debt sustainability ,
    Date: 2008–05–15
  16. By: Etibar Jafarov; Victoria Gunnarsson
    Abstract: This paper assesses the relative efficiency of government spending on health care and education in Croatia by using the so-called Data Envelopment Analysis. The analysis finds evidence of significant inefficiencies in Croatia's spending on health care and education, related to inadequate cost recovery, weaknesses in the financing mechanisms and institutional arrangements, weak competition in the provision of these services, and weaknesses in targeting public subsidies on health care and education. These inefficiencies suggest that government spending on health and education could be reduced without undue sacrifices in the quality of these services. The paper identifies ways to do that.
    Keywords: Working Paper , Croatia , Government expenditures , Health care , Education ,
    Date: 2008–05–30
  17. By: Strawinski, Pawel
    Abstract: This paper studies flows on the labour market in Poland in 1995-2008. We show that the main driving force behind the unemployment rate is the behaviour of outflow to employment. Moreover, the flows that involve the state of inactivity constitute for a large share of total flows. They seem to be an idiosyncratic phenomenon of Polish labour market. In addition the inflow to employment is found to be procyclical, while the separation rate is acyclical.
    Keywords: unemployment; job finding; worker flows.
    JEL: J63 J64
    Date: 2008–11–04
  18. By: Sova, Ana Maria (CREST & Université Paris 1 Panthéon-Sorbonne); Sova, Robert (CREST & Université Paris 1 Panthéon-Sorbonne); Rault, Christophe (University of Orléans); Caporale, Guglielmo Maria (Brunel University)
    Abstract: The aim of the present study is to shed some light on the factors affecting Pollution Abatement and Control Expenditure (PACE) in the context of a transition economy such as Romania, in contrast to the existing literature which mostly focuses on developed economies. Specifically, we use survey data of the Romanian National Institute of Statistics and estimate Multilevel Regression Model (MRM) to investigate the determinants of environmental behaviour at plant level. Our results reveal some important differences vis-à-vis the developed countries, such as a less significant role for collective action and environmental taxes, which suggests some possible policy changes to achieve better environmental outcomes.
    Keywords: pollution abatement and control expenditure, transition economy, Multilevel Regression Model (MRM)
    JEL: Q52 C23
    Date: 2008–10
  19. By: Eleonora Mussino (Max Planck Institute for Demographic Research, Rostock, Germany); Alyson van Raalte (Max Planck Institute for Demographic Research, Rostock, Germany)
    Abstract: This paper contributes to the analysis of fertility differentials between migrants and the native-born by examining the transition to first child using event history analysis. The data examined are the first-wave Italian Families and Social Subjects Survey conducted in 2003 and the first-wave Russian Gender and Generations Survey conducted in 2004. The objective of the study is twofold: First we seek to determine whether differences exist in the decision and timing of childbearing between native and foreign-born women in Italy and in Russia. Second we aim to compare the experiences of immigrants in the two countries, to determine whether there may be any commonalities inherent to the immigrant populations, despite moving into widely different contexts. Our results show many similarities in the risk profiles of our two immigrant groups which is more suggestive of immigrants being a distinct group rather than assimilating or conforming to the native fertility patterns. Second, our results do not seem to confirm the presence of either disruption or family formation being key events associated with migration.
    Keywords: Italy, Russia, fertility, immigrants
    JEL: J1 Z0
    Date: 2008–10
  20. By: Ari, Kokko (European Institute of Japanese Studies); Ljungwall, Christer (China Economic Research Center); Gustavsson Tingvall, Patrik (China Economic Research Center)
    Abstract: This paper investigates to what degree neighboring Chinese provinces were linked to each other in terms of economic growth, income levels, and foreign direct investment during the period 1994-2003. When looking at mainland China, we find that both the level of income and the rate of income growth in a province depend on developments in neighboring provinces. However, we find no evidence of any positive interdependence between growth in rich coastal provinces and their immediate inland neighbors. This suggests that there has been little harmonization in economic growth rates between these regions, and that the immediate hinterland of the coastal growth centers might be bypassed as China’s manufacturing sector is moving west.
    Keywords: Domestic integration; growth interdependence; China’s Economy
    JEL: F14 F15 O53
    Date: 2008–10–01
  21. By: Klapper, Leora; Tzioumis, Konstantinos
    Abstract: The authors examine the effects of taxation on financing policy using the corporate tax reform in 2001 in Croatia as a natural experiment. Since the extant literature on tax effects on capital structure studies listed firms in developed countries, it is worth investigating whether the same results apply to privately-held, small and medium size firms in transition economies. The findings provide significant evidence that lower taxes have affected the capital structure of Croatian firms, resulting in increased equity levels and decreased long-term debt levels. The authors also find that smaller and more profitable firms weremore likely to reduce their debt levels. These findings are consistent with the trade-off theory of capital structure, which suggests that lower taxes decrease the incentive to hold debt due to decreasing interest tax deductibility.
    Keywords: Debt Markets,Taxation&Subsidies,Emerging Markets,Banks&Banking Reform,Access to Finance
    Date: 2008–10–01
  22. By: Rault, Christophe (University of Orléans); Caporale, Guglielmo Maria (Brunel University); Sova, Ana Maria (CREST & Université Paris 1 Panthéon-Sorbonne); Sova, Robert (CREST & Université Paris 1 Panthéon-Sorbonne)
    Abstract: The expansion of regionalism has spawned an extensive theoretical literature analysing the effects of Free Trade Agreements (FTAs) on trade flows. In this paper we focus on FTAs (also called European agreements) between the European Union (EU-15) and the Central and Eastern European countries (CEEC-4, i.e. Bulgaria, Hungary, Poland and Romania) and model their effects on trade flows by treating the agreement variable as endogenous. Our theoretical framework is the gravity model, and the econometric method used to isolate and eliminate the potential endogeneity bias of the agreement variable is the fixed effect vector decomposition (FEVD) technique. Our estimation results indicate a positive and significant impact of FTAs on trade flows. This finding is robust to the inclusion in the sample of a group of control countries (specifically Belarus, the Russian Federation and Ukraine) that did not sign an FTA. Besides, we show that trade growth after the FTA agreement with the EU was signed exceeded trade growth of the control group of countries which did not become members.
    Keywords: regionalisation, European integration, panel data methods
    JEL: E61 F13 F15 C25
    Date: 2008–10
  23. By: Westerlund, Joakim (Department of Economics, Lund University); Edgerton, David (Department of Economics, Lund University)
    Abstract: In a recent paper Pedroni and Yao (2006) present strong evidence suggesting that Chinese regional output is diverging, a result that fies in the face of the current opinion of Chinese policymakers. This paper provides an in-depth analysis of the reasoning behind this finding. Our main result is that the divergence does exist, even when new data and more advanced methods of analysis are used. We also find that it has both an idiosyncratic and a common component. Hence, the increased output inequalities observed at the regional level is due to both region-specific disparities and to disparities between clubs of regions.
    Keywords: China; Output convergence; Panel unit root tests; Common factor
    JEL: C32 C33 O53 R11
    Date: 2008–10–29
  24. By: Sélin Ozyurt
    Abstract: This paper investigates openness and per capita income spillovers over 367 Chinese cities in the year 2004. Per capita income is modelled as dependent on investment, physical and social infrastructure, human capital, governmental policies and openness to the world. Our empirical analysis improves substantially the previous research in several respects: Firstly, by extending the data set to prefecture-level, it tackles the aggregation bias. Secondly, the introduction of recently developed explanatory spatial data analysis (ESDA) and spatial regression techniques allows to address misspecification issues due to spatial dependence. Thirdly, the endogeneity problem in the regression is taken into consideration through the use of generalised method of moments (GMM) estimator. Our major findings are in Chinese cities, physical and social infrastructure development, human capital and investment could be recognised as major driving sources of per capita income (i), whereas, the government expenditure ratio exerts a negative impact on per capita GDP level (ii). Our empirical findings also yield evidence on the existence of FDI and foreign trade spillovers in China (iii). These findings are robust to a number of alternative spatial weighting matrix specifications.
    Date: 2008–11
  25. By: Donato Masciandaro (Paolo Baffi Centre, Bocconi University); Marc Quintyn (IMF Institute, International Monetary Fund)
    Abstract: We propose a path dependence approach to analyze the evolution of the financial supervisory architecture, focusing on the institutional role of the central bank, and then apply our framework to describe the institutional settings in a selected sample of countries. The policymaker who decides to maintain or reform the supervisory architecture is influenced by the existing institutional setting in a systematic way: the more the central bank is actually involved in supervision, the less likely a more concentrated supervisory regime will emerge, and vice versa (path dependence effect). We test the path dependence effect describing and evaluating the evolution and the present state of the architecture of six national supervisory regimes in South Eastern Europe (SEE): Albania, Bulgaria, Greece, Romania, Serbia and Turkey. The study of the SEE countries confirms the postulated role of the central bank in the institutional setting. In five cases the high involvement of the central bank in supervision is correlated with a multi–authority regime, while in one case a high degree of financial supervision unification is related with low central bank involvement.
    Keywords: Financial Supervision; Central Banks; Path Dependence; Political Economy; South Eastern Europe.
    JEL: G18 G28 E58
    Date: 2008–09

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