nep-tra New Economics Papers
on Transition Economics
Issue of 2012‒03‒28
twenty-one papers chosen by
J. David Brown
Heriot-Watt University

  1. New Divide(s) in Europe? By Vasily Astrov; Vladimir Gligorov; Doris Hanzl-Weiss; Peter Havlik; Mario Holzner; Gabor Hunya; Sebastian Leitner; Zdenek Lukas; Anton Mihailov; Olga Pindyuk; Leon Podkaminer; Josef Pöschl; Sandor Richter; Hermine Vidovic
  2. External Drivers of Institutional Change in Central Asia – Regional Integration Schemes and the Role of Russia and China By Rainer Schweickert, Inna Melnykovska , Hedwig Plamper
  3. Constitutional Property Rights Protection and Economic Growth: Evidence from the Post-Communist Transition By Bjørnskov, Christian
  4. Is china climbing up the quality ladder? By Gabor Pula; Daniel Santabárbara
  5. The Organization of European Multinationals By Marin, Dalia; Rousová, Linda
  6. Factor Intensity, Product Switching, and Productivity: Evidence from Chinese Exporters. By Yue Ma; Heiwai Tang; Yifan Zhang
  7. The nexus between economic freedom and growth: Evidence from CEE countries in transition By Gurgul, Henryk; Lach, Łukasz
  8. Do Public Work Schemes Deter or Encourage Outmigration? Empirical Evidence from China By Chau, Nancy H; Kanbur, Ravi; Qin, Yu
  9. Productivity Growth of the Non-Tradable Sectors in China By Dong He; Wenlang Zhang; Gaofeng Han; Tommy Wu
  10. Energy and Climate Change in China By Carraro, Carlo; Massetti, Emanuele
  11. On the Road: Access to Transportation Infrastructure and Economic Growth in China By Banerjee, Abhijit; Duflo, Esther; Qian, Nancy
  12. Rethinking China.s Path of Industrialization By Wu, Harry X.
  13. Shanghai’s Trade, China’s Growth: Continuity, Recovery, and Change since the Opium War By Keller, Wolfgang; Li, Ben; Shiue, Carol Hua
  14. A Darwinian Perspective on "Exchange Rate Undervaluation" By Du, Qingyuang; Wei, Shang-Jin
  15. The Effects of Internationalization on Innovation: Firm-Level Evidence for Transition Economies By Martijn A. Boermans; Hein Roelfsema
  16. Technological Upgrading in China and India: What Do We Know? By Jaejoon Woo
  17. Does Customer Auditing Help Chinese Workers? By He, Goujun; Perloff, Jeffrey M.
  18. Gender inequality in the labor market in Serbia By Reva, Anna
  19. Firm growth and productivity in Belarus : new empirical evidence from the machine building industry By Cuaresma, Jesus Crespo; Oberhofer, Harald; Vincelette, Gallina A.
  20. Capital Controls with International Reserve Accumulation: Can this Be Optimal? By Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
  21. Opportunities for international portfolio diversification in the balkans’ markets By Dimitriou, Dimitrios; Kenourgios, Dimitris

  1. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Zdenek Lukas (The Vienna Institute for International Economic Studies, wiiw); Anton Mihailov; Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Josef Pöschl (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The present economic crisis bears all the familiar hallmarks of the financial, debt-related and structural aspects of current account crises. All these aspects have lasting level effects and recovery can be very protracted. Export-led growth was an important feature of the recovery period 2010-2011, yet significant inter-country differences persisted. A few countries with severe pre-crisis imbalances (Romania, Bulgaria and the Baltic states) enjoyed reasonable export growth over that period, while other structurally weak economies on the European periphery (Western Balkan countries and the Southern EU) fared badly in that respect. The latter group of countries will continue to lag behind also in the forecast period 2012-2014, while some of the Central European economies (Czech Republic, Poland and Slovakia) will manage to stay out of the vicious circle of low growth, high interest rates and unsustainable debt. These three countries, as well as the Baltic states, are expected to grow by about 3% in the years to come (still significantly below the trend growth rates before the crisis). The remaining EU new member states as well as the Western Balkan countries will achieve only about half of this growth. Turkey, Russia, Ukraine and Kazakhstan will grow by rates of up to 5%.
    Keywords: Central and East European new EU member states, Southeast Europe, GIIPS, financial crisis, future EU member states, Balkans, former Soviet Union, Turkey, economic forecasts, employment, foreign trade, competitiveness, debt, deleveraging, exchange rates, flow of funds, inflation, monetary policy
    JEL: C33 C50 E20 E29 F34 G01 G18 O52 O57 P24 P27 P33 P52
    Date: 2012–03
  2. By: Rainer Schweickert, Inna Melnykovska , Hedwig Plamper
    Abstract: Russia and China are assumed to challenge democratization and to promote autocracy. In a first step, we analyze Central Asia as the most-likely case, considering both Russia and China as relevant external actors. We develop a concept for our analysis based on the different strategies of Russia (dominance) and China (doing-business) towards the region and present the results of a qualitative study of the main dimensions of autocracy promotion with respect to regional and bilateral schemes. In a second step, we extend a previous framework (Melnykovska and Schweickert 2011) and provide econometric evidence based on a panel of post-socialist countries. We show that bilateral schems are (still) more relevant for external influences in Central Asia and that (unintentionally) China’s doing-business approach may in fact promote institutional change. Arguably, democratization should not be a precondition for cooperation as in European Neighbourhood Policy (ENP) but rather be promoted by sweeping economic cooperation incentives
    Keywords: Central Asia, China, Russia, Governance, Regional Integration, Trade, Minorities, Military Threat
    JEL: F53 F59
    Date: 2012–03
  3. By: Bjørnskov, Christian (Department of Economics and Business, Aarhus University)
    Abstract: Abstract: This paper seeks to estimate the economic growth effect of constitutional provisions for property rights protection. It does so using the unique situation in formerly communist countries in Central and Eastern Europe and the Caucasus where all but two introduced new constitutions after the fall of the Iron Curtain. The effects of implementing different constitutional provisions can therefore be observed in a group of countries with the same formal starting point. Estimates provide no evidence of positive effects and mainly point towards a negative conclusion: the introduction of constitutional protection of property rights is not associated with economic development in the long run, but tends to impose costs during a period of institutional transition and implementation proportional to the constitutional change.
    Keywords: property rights; constitutional political economy; transition
    JEL: K40 O43 P16 P37
    Date: 2012–03–20
  4. By: Gabor Pula (European Central Bank); Daniel Santabárbara (Banco de España)
    Abstract: There is an ongoing debate in the literature about the quality content of Chinese exports and to what extent China poses a threat to the market positions of advanced economies. While China’s export structure is very similar to that of the advanced world, its export unit values are well below the level of developed economies. Building on the assumption that unit values reflect quality, the prevailing view of the literature is that China exports low quality varieties of the same products as its advanced competitors. This paper challenges this view by relaxing the assumption that unit values reflect quality. We derive the quality of Chinese exports to the European Union by estimating disaggregated demand functions from a discrete choice model. The paper has three major findings. First, China’s share of the European Union market is larger than would be justified only by its low average prices, implying that the quality of Chinese exports is high compared to many competitors. Second, China has gained quality relative to other competitors since 1995, indicating that China is climbing up the quality ladder. Finally, our analysis of the supply side determinants reveals that the relatively high quality of Chinese exports is related to processing trade and the increasing role of global production networks in China.
    Keywords: Chinese exports, vertical product differentiation, quality ladder, global production networks, discrete choice model, COMEXT database
    JEL: F1 F12 F14 F15 F23
    Date: 2012–02
  5. By: Marin, Dalia; Rousová, Linda
    Abstract: Recent literature on international trade has established that the most productive firms become multinationals. But our data reveal a startling variation in productivity levels of foreign affiliates across the countries in Eastern Europe of the same European multinational parent firms suggesting that not all multinationals transplant their home productivity advantage to the new EU Member States and Emerging Europe. One candidate for this startling difference in productivity levels among foreign affiliates is the ability of European multinationals to transport their business model abroad. This paper examines the conditions under which European multinationals give autonomy to their subsidiaries and delegate authority to them. We also analyse the conditions under which European multinationals transplant their business model to Eastern Europe. We collect original and unique matched parent and affiliate data on the internal organization of 660 German and Austrian parent firms and 2200 of their subsidiaries in Eastern Europe including the former Soviet Union. We test the hypothesis that the ability of European multinationals to transplant their business model to foreign affiliates is determined by the organization of European multinationals on the one hand and the market environment their affiliate firms face in Eastern Europe on the other hand. We show that the business culture of parent firms accounts for about 50 percent of the variation of the organization of subsidiaries, while the market environment of subsidiaries contributes the rest.
    Keywords: level of decentralisation; multinational firms with endogenous organisation; organisational transfer across countries; trust
    JEL: D21 F23 L22 O1
    Date: 2012–03
  6. By: Yue Ma; Heiwai Tang; Yifan Zhang
    Abstract: This paper analyzes the causal relations between firms' productivity, factor intensity and export participation. Using propensity score matching techniques and firm level panel data for Chinese manufacturing firms over the 1998-2007 period, we find strong evidence of domestic firms self selecting into export markets with higher productivity ex ante, and enhanced productivity ex post. No such pattern is observed among foreign invested firms. We also find that both domestic and foreign new exporters exploit China's low labor costs and specialize in their core competence, that is, firms become less capital intensive after exporting, relative to the matched non exporting counterparts in the same industry. To rationalize these results that contrast with most findings in the existing literature, we develop a variant of the multi-product model of Bernard, Redding, and Schott (2010) to consider varying capital intensity across products. Using transaction level export data, we find evidence that Chinese exporters add new products that are more labor intensive than existing products and drop products that are less labor intensive, supporting the model predictions. Firms with a bigger decline in capital intensity after exporting are found to have a larger increase in measured TFP.
    Keywords: Exporters, Productivity, Factor Intensity, Multi product firms
    JEL: F11 L16 O53
    Date: 2011
  7. By: Gurgul, Henryk; Lach, Łukasz
    Abstract: This study sought to examine the causal links between economic freedom and economic growth of new EU members in transition in the period 2000-2009. The empirical results suggest significant causality running from monetary and fiscal freedom, trade openness, regulation of credit, labour, and business, legal structure and security of property rights, and access to sound money to growth, especially in less and moderately developed CEE transition countries. Moreover, we found evidence that economic freedom was one of the factors stimulating the convergence of these economies towards rich EU members. The evidence of causality in the opposite direction was much weaker.
    Keywords: economic growth, economic freedom, CEE transition economies
    JEL: O10 O40
    Date: 2011–12–20
  8. By: Chau, Nancy H; Kanbur, Ravi; Qin, Yu
    Abstract: How does the introduction of rural public work schemes impact individual incentives to migrate? This paper examines this question in the context of rural public work program (Yigong-daizhen) in China, and unveils empirical evidence that suggest that the introduction of Yigong-daizhen projects in fact stimulates outmigration at the village level, after controlling for village characteristics and project types. By furthermore accounting for the endogeneity of Yigong-daizhen placement, the impact of such projects is found to be even larger. These results are consistent with household migration behavior in the presence of significant cost of migration, and credit market imperfection.
    Keywords: Outmigration; Public Works Schemes; Rural China
    JEL: H53 J43 O15
    Date: 2012–01
  9. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Wenlang Zhang (Hong Kong Monetary Authority); Gaofeng Han (Hong Kong Monetary Authority); Tommy Wu (Hong Kong Monetary Authority)
    Abstract: Little is known about the total factor productivity of the non-tradable sectors in China. In this paper we estimate productivity growth of the non-tradable sectors by studying the relative price movements of the non-tradable sectors vis-a-vis the tradable sectors, i.e. changes in the internal real exchange rate. We find that prices of the non-tradable sectors have risen significantly faster than those of the tradable sectors, and China's internal real exchange rate has appreciated at a faster pace than the renminbi real effective exchange rate. We also find the non-tradable sectors have seen much lower productivity growth than the tradable sectors, and such productivity differentials are large when compared to other economies. We argue that if productivity growth in the non-tradable sectors remains slow, China will likely see more difficulty in rebalancing its growth pattern and higher inflationary pressures in the medium term. As such, it is important for the authorities to take policy actions to raise productivity growth in the non-tradable sectors.
    Keywords: Tradable and Non-Tradable Sectors, Internal Real Exchange Rate, Total Factor Productivity
    JEL: E31 F31 F43
    Date: 2012–03
  10. By: Carraro, Carlo; Massetti, Emanuele
    Abstract: This paper examines future energy and emissions scenarios in China generated by the Integrated Assessment Model WITCH. A Business-as-Usual scenario is compared with five scenarios in which Greenhouse Gases emissions are taxed, at different levels. The elasticity of China’s emissions is estimated by pooling observations from all scenarios and compared with the elasticity of emissions in OECD countries. China has a higher elasticity than the OECD for a carbon tax lower than 50$ per ton of CO2-eq. For higher taxes, emissions in OECD economies are more elastic than in China. Our best guess indicates that China would need to introduce a tax equal to about 750$ per ton of CO2-eq in 2050 to achieve the Major Economies Forum goal set for mid-century. In our preferred estimates, the discounted cost of following the 2°C trajectory is equal to 5.4% and to 2.7% of GDP in China and the OECD, respectively.
    Keywords: China; climate change; energy; policy
    JEL: F5 Q1 Q54 Q58
    Date: 2012–03
  11. By: Banerjee, Abhijit; Duflo, Esther; Qian, Nancy
    Abstract: This paper estimates the effect of access to transportation networks on regional economic outcomes in China over a twenty-period of rapid income growth. It addresses the problem of the endogenous placement of networks by exploiting the fact that these networks tend to connect historical cities. Our results show that proximity to transportation networks have a moderate positive causal effect on per capita GDP levels across sectors, but no effect on per capita GDP growth. We provide a simple theoretical framework with empirically testable predictions to interpret our results. We argue that our results are consistent with factor mobility playing an important role in determining the economic benefits of infrastructure development.
    Keywords: firms; growth; inequality; infrastructure
    JEL: D2 O4 R4
    Date: 2012–03
  12. By: Wu, Harry X.
    Abstract: This study shows that China.s post-1949 state-led industrialization has closely followed an underlying path that began in the late nineteenth century. It was initiated by pressing national defence needs and has since been motivated by the same and strong incentives for a faster catch-up with the West despite radical regime shifts. Government determined or influenced resource allocation benefited selected industries and hence nurtured vested interest groups connecting and integrating with the ruling elite, which have strengthened and sustained the path. This means that the path is inherently inefficient which is evidenced by a newly constructed dataset. Reform measures can only temporarily improve efficiency performance, but are unable to break the path in the absence of a genuine political democracy.
    Keywords: government engineered industrialization, path dependence, central planning, economic reform, efficiency
    Date: 2011
  13. By: Keller, Wolfgang; Li, Ben; Shiue, Carol Hua
    Abstract: In this paper, we provide aggregate trends in China’s trade performance from the 1840s to the present. Based on historical benchmarks, we argue that China’s recent gains are not exclusively due to the reforms since 1978. Rather, foreign economic activity can be understood by developments that were set in motion in the 19th century. We turn our focus to Shanghai, currently the world’s largest port. Shanghai began direct trade relations with western nations starting in 1843. By 1853, Shanghai already accounted for more than half of China’s foreign trade. In tracking the levels and growth rates of the city’s net and gross imports and exports, foreign direct investment, and foreign residents over more than a century, we find that Shanghai’s level of bilateral trade today with the United States, the United Kingdom, or Japan, for example, are by no means high given Shanghai’s 19th century experience. This paper argues that a regional approach that embeds national trading destinations within an international trading system provides a meaningful approach to understanding the history of China’s trade.
    Keywords: colonialism; foreign direct investment; institutions; international migration; re-exports; treaty port
    JEL: F10 F22 F23 N65 N70 N95
    Date: 2012–01
  14. By: Du, Qingyuang; Wei, Shang-Jin
    Abstract: Though the real exchange rate is a key price for most economies, our understanding of its determinants is still incomplete. This paper studies the implications of status competition in the marriage market for the real exchange rate. In theory, a rise in the sex ratio (increasing relative surplus of men) can generate a decline in the real exchange rate (RER) through both a savings channel and an effective labor supply channel. The effects can be quantitatively large if the biological desire for a marriage partner is strong. Empirically, we show that within China, those regions with a faster increase in the sex ratio also exhibit a faster decline in the RER (the relative price of nontradables). Furthermore, across countries, those with a high sex ratio tend to have a low real exchange rate, beyond what can be explained by the Balassa-Samuelson effect, financial underdevelopment, dependence ratio, and exchange rate regime classifications. As an application, the estimation suggests that these structural factors can account for the Chinese exchange rate almost completely.
    Keywords: currency manipulation; equilibrium real exchange rate; surplus men
    JEL: F3 F4 J1 J7
    Date: 2012–03
  15. By: Martijn A. Boermans; Hein Roelfsema
    Abstract: It is well-documented that international enterprises are more productive. Only few studies have explored the effect of internationalization on productivity and innovation at the firm-level. Using propensity score matching we analyze the causal effects of internationalization on innovation in 10 transition economies. We distinguish between three types of internationalization: exporting, FDI, and international outsourcing. We find that internationalization causes higher levels of innovation. More specifically, we show that (i) exporting results in more R&D, higher sales from product innovation, and an increase in the number of international patents (ii) outward FDI increases R&D and international patents (iii) international outsourcing leads to higher sales from product innovation. The paper provides empirical support to the theoretical literature on heterogeneous firms in international trade that argues that middle income countries gain from trade liberalization through increases in firm productivity and innovative capabilities.
    Keywords: Firm heterogeneity, Internationalization, Innovation, Transition economies
    JEL: D22 F14 F23 O12
    Date: 2012–03
  16. By: Jaejoon Woo
    Abstract: This paper studies sources of technological upgrading in China and India. What is striking about the impressive growth of China and (to a lesser degree) India is that they export products associated with a high productivity level that is much higher than a country at their income level. China’s export bundle has changed dramatically, diversifying into technologyintensive products. China is now the largest exporter of high-technology products in the world. Exports of India are still significantly less technologically sophisticated, while India has been more successful in exports of business and information technology (IT) services. It presents empirical evidence on the important role of FDI inflows and imported capital goods that embody new technology for TFP growth in a large panel of advanced and developing countries over 1970-2007. Consistent with the cross-country evidence, micro-data and case studies strongly suggest that FDI and import of capital goods have contributed to rapid technological upgrading especially in China. Puzzlingly, however, the TFP level in China is much lower than would be expected from its score on Index of Technological Sophistication of exports, raising a doubt about whether the shift in export bundle towards high-technology products is associated with a technological sophistication of domestic contents of export products. An important explanation appears to be China’s prime role as a final assembler of international production network. The magnitude of reversal in net export position of China across the two categories, intermediate and finished goods, is striking, which implies that more and less developed economies are being affected very differently by China’s rise. With a view to upgrading the capability to absorb advanced technologies and innovate, China and India have increasingly emphasised human capital, skill-intensive industries and R&D efforts. Nonetheless, our analysis shows that there is still an enormous scope for technological catching-up over the next decades.<P>Modernisation technologique en Chine et en Inde : Que savons-nous?<BR>Ce papier étudie les sources de modernisation technologique en Chine et Inde. Ce qui est frappant dans la croissance impressionnante de la Chine et, dans une moindre mesure, de l’Inde est que ces pays exportent des produits associés à un haut niveau de productivité qui est bien plus grand qu’un pays de leur niveau de revenu. La structure des exportations de la Chine a fondamentalement changé, se diversifiant en produits intensifs en technologie. La Chine est dorénavant le plus grand exportateur du monde de produits de haute technologie. Les exportations de l’Inde restent significativement moins sophistiquées technologiquement, quoique l’Inde ait connu davantage de succès dans les exportations de services de technologie du commerce ainsi que de l’information et de la communication (TIC). Ce papier présente des preuves empiriques du rôle important des flux entrants d’IDE et des biens de capital importés comprenant la nouvelle technologie pour la croissance de PGF pour un large panel de pays avancés ou en développement sur la période 1970-2007. En ligne avec les preuves longitudinales, données microéconomiques et études de cas, il suggère fortement que les IDE et importations de biens de capital ont contribué à la rapide modernisation de technologie, particulièrement en Chine. Curieusement, cependant, le niveau de PGF en China est bien plus bas qu’espéré au regard de son Indice de Sophistication Technologique des Exportations, faisant naître le doute que la transformation de la structure des exportations vers des produits de haute-technologie est associée avec à une sophistication technologique du contenu national des produits d’exportation. Une explication importante réside dans le rôle de premier plan de la Chine en tant qu’assembleur final de la chaîne de production mondiale. La magnitude du revirement de la position nette des exportations de la China entre les deux catégories, produits intermédiaires et finaux, est saisissante, ce qui implique que les économies développées sont plus ou moins affectées et de façon très différente par la montée de la Chine. Dans l’optique d’améliorer la capacité d’absorber les technologies avancées et les innovations, la Chine et l’Inde ont mis l’accent sur le capital humain, les industries intensives en compétences et les efforts en R&D. Néanmoins, notre analyse montre qu’il reste une place énorme pour le rattrapage technologique dans les prochaines décennies.
    Keywords: growth, FDI, technology diffusion, technological upgrading, TFP, technological classification of export, export processing, international production network, croissance, transfert de technologie, modernisation technologique, PGF, classification technologique des exportations, traitement des exportations, chaine mondiale de production
    JEL: F15 F21 O33 O47 O53
    Date: 2012–03–01
  17. By: He, Goujun; Perloff, Jeffrey M.
    Abstract: Auditing by downstream firms has limited effects on Chinese firms’ adherence to labor standards and other measures of blue collar workers well-being. Auditing does not affect the suppliers’ blue-collar employees’ wages, probability of belonging to a union, or likelihood of working overtime. However, audited firms are more likely to provide rural migrant workers pensions, business medical insurance, and unemployment insurance. 
    Keywords: Applied Economics, Chinese Workers, Customer Auditing
    Date: 2012–02–02
  18. By: Reva, Anna
    Abstract: This paper presents a broad overview of labor market indicators for men and women in Serbia with a focus on employment patterns, entrepreneurship and career advancement as well as earnings differentials. The analysis relies primarily on the results of the Labor Force Surveys conducted in Serbia in April 2008 and October 2009. The findings show that although the overall labor market situation in Serbia is difficult, women are in a much more disadvantageous position than men. Women are much less likely to be employed, start a business or advance in the political arena. Furthermore, there is a significant wage gap between men and women in a number of sectors and occupational groups with low educated women being particularly disadvantaged. The results of the Oaxaca-Blinder decomposition demonstrate that the wage gap is indicative of discrimination of women in the labor market as earnings differentials cannot be explained by differences in observed characteristics of male and female employees. Based on the obtained results, the paper outlines four broad areas that require the attention of policy-makers: employment generation; enhancement of education outcomes; improvement of the regulatory environment and support to women's business and political careers; and promotion of transparent performance setting mechanisms.
    Keywords: Labor Markets,Population Policies,Gender and Development,Population&Development,Gender and Law
    Date: 2012–03–01
  19. By: Cuaresma, Jesus Crespo; Oberhofer, Harald; Vincelette, Gallina A.
    Abstract: Using a unique dataset comprising information for more than 900 firms in the machine building sector in Belarus, this paper investigates the determinants of firm growth for an economy where state ownership of enterprises is widespread. It uses panel data models based on generalizations of Gibrat's law, total factor productivity estimates and matching methods to assess the differences in firm growth between private and state-owned firms. The results indicate that labor hoarding and soft budget constraints play a particularly important role in explaining differences in performance between these two groups of firms.
    Keywords: Microfinance,Labor Policies,Economic Theory&Research,Economic Growth,Labor Markets
    Date: 2012–03–01
  20. By: Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
    Abstract: Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments.
    Keywords: Capital controls; International reserves
    JEL: E58 F36 F41
    Date: 2012–01
  21. By: Dimitriou, Dimitrios; Kenourgios, Dimitris
    Abstract: This paper examines long and short-run relationships among three emerging Balkan stock markets (Romania, Bulgaria and Croatia), two developed European stock markets (Germany and Greece) and United States (U.S.), during the period 2000 - 2005. We apply Johansen's (1988) cointegration methodology to test the long-run relationships between these markets and Granger's (1969) causality methodology in order to capture short-run cointegration. Our findings are mixed. We provide evidence on long-run relationships between the Bulgarian and Croatian stock markets and the developed markets. On the other hand, there is no any cointegration among the developed markets and the Romanian market. Moreover, there is no cointegrating relationship among the three regional emerging markets, while short-run relationships exist only among the region. These results have crucial implications for investors regarding the benefits of international portfolio diversification.
    Keywords: Balkan equity markets; Johansen cointegration; Granger causality
    JEL: F15 G11 F30
    Date: 2012–02

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