|
|
Working Paper Series in Economics
| All 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 |
-
No. wp2024-2
(Download at EconPapers)
- Natalia Levenko
- Monetary policy transmission in different credit markets
The paper examines the intermediate stage of monetary policy transmission by
analysing how credit growth responds to interest rate changes. It studies the markets
for mortgages, consumer credit, and corporate loans separately, and pays special
attention to periods when the short-term interest rate was very low. It uses quarterly
country-level data from 2005Q1 to 2022Q4 for 15 euro area countries and applies
standard panel-data estimation techniques. The results indicate that credit markets
respond to changes in monetary policy in the expected way. While the magnitude
of the reaction varies across credit markets, there are no discernible differences
between the reactions of different subgroups in the sample. The hypothesis that
monetary policy might be less effective when interest rates are very low is not
supported by the empirical evidence. Rather the opposite, the paper finds that when
Euribor is very low, credit markets become more responsive to changes in interest
rates. This holds true primarily in the market for corporate loans and to some extent
in the market for mortgages.
- JEL-Codes: E44, E51, E52
- Keywords: monetary policy transmission, interest rate channel, bank lending channel, credit growth, housing loans, corporate loans, consumer credit
-
No. wp2024-1
(Download at EconPapers)
- Konstantins Benkovskis, Jaanika Meriküll and Aurelija Proškute
- The transmission of trade shocks across countries: firm-level evidence from the Covid-19 crisis
This paper studies the margins and heterogeneity of adjustments to trade shocks by estimating
how Covid-19 restrictions affected imports and exports. We use data from Lithuania, Latvia
and Estonia on foreign trade at the level of the firm and the partner country and at monthly
frequency from January 2019 to December 2020. The focus is on the short-term adjustment
and on the first wave of the pandemic. We find that the adjustment to the restrictions mostly
occurs through the intensive margin, meaning trade values are reduced rather than trade in certain
markets or products ceasing. It is further observed that quantity played a more important
role in the adjustment process than prices and that both upstream and downstream restrictions
played an equally important role in the decline of foreign trade. It is shown that differentiated
products that are difficult to replace are responsible for this adjustment pattern.
- JEL-Codes: F14, F61, D22
- Keywords: transmission of shocks, input-output linkages, global value chains, Covid-19, workplace closing
-
No. wp2023-7
(Download at EconPapers)
- Merike Kukk, Jan Toczynski and Christopher Basten
- Beyond the Headline: How Personal Exposure to
Inflation Shapes the Financial Choices of Households
Using individual level panel data from a period of volatile inflation in Estonia
in 2005-11 and interactive fixed effect estimation, we find individual consumption to
respond to personal inflation beyond the headline rate. Households are exposed to
different inflation due to different consumption baskets. For each percentage point of
higher personal inflation exposure, they increase consumption by more than 1%, and
also increase stock market investments. These responses are consistent with backwardlooking
inflation expectations. They are financed with savings or borrowing, except
when the household is liquidity-constrained or over-indebted. Extra demand when
inflation is already high can make inflation persistent and dependent on its current
distribution
- JEL-Codes: D14, D15, E21, E31
- Keywords: inflation heterogeneity, personal inflation exposure, consumption, borrowing, interactive fixed effects, intertemporal choices
-
No. wp2023-6
(Download at EconPapers)
- Dmitry Kulikov and Nicolas Reigl
- The natural rate of unemployment in Estonia: empirical
determinants and a new semi-structural model
This paper addresses the empirical modelling of the natural rate of unemployment in
Estonia. It has two interlinked parts. The first part considers potential empirical determinants
of the natural rate of unemployment in a sample of 31 OECD countries, and
the second incorporates many of those determinants into a new quarterly semi-structural
model of the natural rate of unemployment for Estonia, which we estimate over the period
1998–2019. Our methodological approach to building this new semi-structural model is to
explore a space of 4 212 alternative model specifications, each one featuring a distinct
combination of extrinsic determinants of the natural rate, and measures of the rate of unemployment
and the state of the labour market in Estonia. We find that although some of
these potential determinants enter our model in a statistically significant way, the overall
time dynamics of the estimated natural rate of unemployment for Estonia are not much
affected by these factors, and our estimates of the natural rate are quite similar across all of
these determinants over the full sample period. However, we also find that our estimates of
the natural rate of unemployment are quite sensitive to the choice of measures of the state
of the labour market and the rate of unemployment used in estimating the new model
- JEL-Codes: E32, E58, C32, C52
- Keywords: natural rate of unemployment, unemployment gap, NAIRU, panel data, semistructural modelling, model averaging
-
No. wp2023-5
(Download at EconPapers)
- Eva Branten
- Income expectations, risk attitudes and household borrowing decisions
This paper studies whether positive expectations for real income and risk
aversion can provide information beyond that given by the main economic and
sociodemographic characteristics for predicting whether a household applied for a
loan or increased its outstanding liabilities. Microdata from the Eurosystem
Household Finance and Consumption Survey (HFCS) are employed in the study,
which covers a subgroup of the countries conducting the survey that have a panel
component. The main estimation method used is a set of panel data fixed effects
models. The estimation results imply that positive expectations for real income
matter for increases in mortgage loans, but not for non-mortgage loans. Risk
aversion is negatively related with the probability of applying for a loan but has no
significant effect on an increase in debt
- JEL-Codes: G51, D14
- Keywords: household borrowing, financial expectations, risk attitudes, Eurosystem Household Finance and Consumption Survey
-
No. wp2023-4
(Download at EconPapers)
- Merike Kukk, Natalia Levenko and Nicolas Reigl
- Measuring the effects of borrower-based policies
on new housing loans in Estonia
The paper evaluates the outcomes of the borrower-based macroprudential policy
measures that were introduced in Estonia in 2015. The core of the analysis is the
response of the credit market in 2016–2021 to the upper limit on the debt serviceto-income ratio for new housing loans. The paper employs a novel approach based
on the distribution of loan-level data, which allows the analysis to be made using
only data from the post-treatment period. The average number of loans affected,
meaning those that were rejected or taken in a smaller amount, is estimated to be
on average around eleven per cent of the total number of new loans. The total stock
of housing loans is on average around 1.7 per cent smaller. The losses in the volume
of new loans due to the limit are fairly stable over the years despite the volume of
housing loans growing in recent years.
- JEL-Codes: G21, G51, E58, D39
- Keywords: borrower-based policy measures, debt service-to-income ratio, housing loans, density distributions, extensive and intensive margin
-
No. wp2023-3
(Download at EconPapers)
- Karsten Staehr, Olegs Tkacevs and Katri Urke
- Fiscal performance under inflation and inflation surprises: evidence from fiscal reaction functions
for the Euro Area
This paper estimates fiscal reaction functions to examine the importance
of inflation and inflation surprises for fiscal outcomes in the euro area
countries, covering the first 12 countries to join the euro area. The effect of
HICP inflation on the primary fiscal balance in per cent of GDP is positive,
and statistically and economically significant. The positive effect stems
from both the revenue side, particularly direct taxes and indirect taxes, and
the expenditure side, particularly primary current expenditures. The effects
of HICP inflation on the primary balance and other fiscal outcomes appear
in large part to stem from inflation surprises, which are errors in the
inflation forecasts available for preparing budgets. The positive effect on the
primary fiscal balance does not exhibit noticeable non-linearities.
- JEL-Codes: H6, H62, H68, E31
- Keywords: public finances; fiscal outcome; inflation; inflation surprises
-
No. wp2023-2
(Download at EconPapers)
- Lukasz Wiktor Olejnik
- Economic growth and military expenditure
in the countries on NATOʼs Eastern flank in 1999–2021
This paper studies how military expenditure impacted economic growth in nine
Central and Eastern European countries in 1999–2021 using a newly created dataset
of disaggregated military expenditures. The results of estimating an ARDL growth
model with military expenditure confirm that various kinds of military expenditure
had a negative and statistically significant influence on economic growth in the
longer run, and show that personnel expenditures and labour market adjustments
were the most important channel of influence. Equipment purchases and army
maintenance also have a negative influence on GDP growth, but that influence is
smaller. Fiscal multipliers of military expenditure were estimated using the Local
Projections method to measure the short-run effects, and values below unity were
obtained. The short-run fiscal multipliers of military expenditure are 0.2–0.5 lower
than the fiscal multipliers of non-military government consumption
- JEL-Codes: H56, O11
- Keywords: military expenditures; military expenditures and economic growth; fiscal multiplier; fiscal adjustments
-
No. wp2023-1
- Karsten Staehr
- Economic Growth, Current Account Dynamics and
Growth Regimes in the Baltic States
This paper considers the growth performance of the Baltic
states from the mid-1990s to 2021. Economic growth was fast
before the global financial crisis, but slowed markedly after the
crisis. Panel data estimations using seemingly unrelated
regressions suggest that the dynamics of the current account
balance are important for short and medium-term growth in the
Baltic states, but that there is a break signifying a change of
growth regime around the time of the global financial crisis.
Before the crisis, rapid growth was supported by domestic
demand that was made possible by large current account deficits.
After the crisis, economic growth was supported by external
demand reflected in an improvement of the current account. The
shift in the economic growth regime after the global financial
crisis has brought lower but also more sustainable growth.
- JEL-Codes: F32, F34, O40
- Keywords: economic growth, economic convergence, current account balance, global financial crisis
-
No. wp2023-07
- Merike Kukk and Jan Toczynski
-
No. wp2023-07
(Download at EconPapers)
- Merike Kukk and Jan Toczynski
- Beyond the Headline: How Personal Exposure to
Inflation Shapes the Financial Choices of Households
Using individual level panel data from a period of volatile inflation in Estonia
in 2005-11 and interactive fixed effect estimation, we find individual consumption to
respond to personal inflation beyond the headline rate. Households are exposed to
different inflation due to different consumption baskets. For each percentage point of
higher personal inflation exposure, they increase consumption by more than 1%, and
also increase stock market investments. These responses are consistent with backwardlooking
inflation expectations. They are financed with savings or borrowing, except
when the household is liquidity-constrained or over-indebted. Extra demand when
inflation is already high can make inflation persistent and dependent on its current
distribution
- JEL-Codes: D14, D15, E21, E31
- Keywords: inflation heterogeneity, personal inflation exposure, consumption, borrowing, interactive fixed effects, intertemporal choices
-
No. wp2023-06
(Download at EconPapers)
- Dmitry Kulikov and Nicolas Reigl
- The natural rate of unemployment in Estonia: empirical determinants and a new semi-structural model
This paper addresses the empirical modelling of the natural rate of unemployment in
Estonia. It has two interlinked parts. The first part considers potential empirical determinants
of the natural rate of unemployment in a sample of 31 OECD countries, and
the second incorporates many of those determinants into a new quarterly semi-structural
model of the natural rate of unemployment for Estonia, which we estimate over the period
1998–2019. Our methodological approach to building this new semi-structural model is to
explore a space of 4 212 alternative model specifications, each one featuring a distinct
combination of extrinsic determinants of the natural rate, and measures of the rate of unemployment
and the state of the labour market in Estonia. We find that although some of
these potential determinants enter our model in a statistically significant way, the overall
time dynamics of the estimated natural rate of unemployment for Estonia are not much
affected by these factors, and our estimates of the natural rate are quite similar across all of
these determinants over the full sample period. However, we also find that our estimates of
the natural rate of unemployment are quite sensitive to the choice of measures of the state
of the labour market and the rate of unemployment used in estimating the new model.
- JEL-Codes: E32, E58, C32, C52
- Keywords: natural rate of unemployment, unemployment gap, NAIRU, panel data, semistructural modelling, model averagin
-
No. wp2022-7
(Download at EconPapers)
- Merike Kukk and Natalia Levenko
- Interest rate spreads in Estonia:
different stories for different types of loan
The paper studies the determinants of the interest rate spreads in Estonia,
a country that stands out among European countries for its wide spreads. Four
distinct credit markets are considered for housing loans, consumer loans, long-term
corporate loans and short-term corporate loans. The paper uses quarterly panel data
from 2000Q1–2021Q1. It uses a two-stage approach to disaggregate the observed
spread into a component determined by the bank-specific factors and a component
determined by the market-specific factors, which is labelled in the literature as the
pure spread. For each of the two components, the paper finds substantial differences
in the determinants of the spreads across different types of loan. While credit risk
is important for long-term corporate and housing loans, operating costs are
significant in the segment of short-term loans. Similarities found between the loan
markets were that the pure spreads are found to be related to the business cycle and
market concentration, while the relationship with interest rate risk is found to be
insignificant.
- JEL-Codes: G21, G28, D40, E43
- Keywords: interest rate spreads, interest rate margins, banking sector, housing loans, consumer loans, corporate loans, market concentration
-
No. wp2022-6
(Download at EconPapers)
- Gerda Kirpson, Martti Randveer, Nicolas Reigl, Karsten Staehr and Lenno Uuskula
- Macroeconomic news and sovereign interest rate spreads
before and during Quantitative Easing
This paper studies how macroeconomic news affected the spreads of Italian
sovereign bonds before and during the quantitative easing by the European Central
Bank. Daily changes in the bond spreads are regressed on macroeconomic news
shocks, where the news shocks are computed as the difference between the
published data and the preceding private-sector forecasts. The analysis shows that
macroeconomic news shocks had economically and statistically significant effects
in 2012–2014 before quantitative easing, but the effects were negligible afterwards
with a possible exception of a period in 2019 when the net asset purchases were
paused
- JEL-Codes: E44, E58
-
No. wp2022-5
(Download at EconPapers)
- Jaanika Merikyll and Alari Paulus
- Were jobs saved at the cost of productivity
in the Covid-19 crisis ?
Economic recessions can boost the productivity-enhancing reallocation of jobs,
yet the Covid-19 crisis has provided limited and mixed evidence of that. The paper
studies the link between productivity and reallocation and investigates the role of
job retention schemes in it, using a rich administrative dataset for Estonia that
covers the whole population of firms from 2004 to 2020. We find persistent
evidence for the reallocation of jobs towards more productive sectors and firms.
However, the within-sector reallocation was surprisingly unresponsive to
productivity in the Covid-19 crisis, in sharp contrast to the experience in the
previous major crisis, the Great Recession. We show that a generous job retention
scheme supressed the acceleration of within-industry reallocation towards more
productive firms, which had negative consequences for aggregate productivity
during Covid-19. These estimates appear sufficiently large to imply that there are
negative overall welfare effects that offset the positive employment effect.
- JEL-Codes: J62, D24, J68, D61
- Keywords: job reallocation, productivity, Covid-19, cleansing effect, firm exit and entry, job retention scheme
-
No. wp2022-4
(Download at EconPapers)
- Merike Kukk, Alari Paulus and Nicolas Reigl
- Credit market concentration and
systemic risk in Europe
We assess empirically the relationship between credit market concentration and a novel country-level systemic risk indicator that has been developed
at the European Central Bank. We find a weakly U-shaped relationship between market concentration and systemic risk for Western European countries, where very low and high levels of market concentration are associated
with higher systemic risk. Cumulative estimates with dynamic models show
that systemic risk has a persistent negative response to an increase in market
concentration from low and median levels of concentration. Local projection
estimates for the period preceding the global financial crisis also suggest that
an increase in market concentration may have further added to systemic risk
at a time when it was building up in countries with high banking concentration, demonstrating the complexity of the relationship between systemic risk
and market concentration
- JEL-Codes: G10, G21, E58, C22, C54
- Keywords: systemic risk, financial stability, credit institutions, credit growth, market concentration
-
No. wp2022-3
(Download at EconPapers)
- Karsten Staehr and Katri Urke
- The European Structural and Investment Funds
and Public Investment in the EU Countries
Public investment is low and has declined in many EU countries since the global
financial crisis. This paper estimates the effects of the various European Structural
and Investment Funds (ESIF) on public investment in the EU countries. The
analysis is run on annual data from 2000 to 2018 using dynamic panel data specifications. Funding from the Cohesion Fund, the EU’s facility for its less developed
members, has an almost one-to-one effect on public investment in the short term
and more in the longer term. Funding from the European Regional Development
Fund may have some effect, but it cannot be estimated precisely. Other ESIF funds
do not have predictive effects on public investment in the EU countries.
- JEL-Codes: H54, H61, H77
- Keywords: public investment, structural and investment funds, EU
-
No. wp2022-2
(Download at EconPapers)
- Alari Paulus
- Business investment, the user cost of
capital and firm heterogeneity
The sensitivity of business fixed investment to one of its key determinants,
the user cost of capital, has been little investigated with firm-level data that
captures firm heterogeneity to the full extent. I study the determinants of
business fixed investment in Estonia, using the universe of business statements for non-financial firms in 1994-2020 from administrative records. The
results with various panel data models provide strong support for a theoretical long-term relationship between the gross investment rate, and changes in
production output and the user cost of capital. I find that the capital stock
is modestly responsive to changes in output and the user cost of capital, with
elasticities less than 0.5 in absolute size, and that different estimation strategies yield broadly similar results. Elasticities differ by firm size, but sectoral
variation is relatively limited. User cost elasticities also exhibit notable variation over time, while output elasticities are much more stable. I also find that
investments in machinery and equipment are more elastic than investments
in buildings and structures.
- JEL-Codes: D22, E22, H32
- Keywords: business investment, user cost of capital, corporate taxation, firm panel data
-
No. wp2022-1
(Download at EconPapers)
- Olivier Damette, Karolina Sobczak and Thierry Betti
- Financial Transaction Tax, macroeconomic effects and tax
competition issues: a two-country financial DSGE model
We document how introducing a financial transaction tax affects real and financial activity in a general
equilibrium framework. Our model replicates some interesting stylised facts about financial markets.
Informed, or rational, traders follow the standard rational expectations, while exogenous disturbances, such
as optimism or pessimism shocks, affect the expectations of noise traders. An entry cost is introduced to
endogenise the entry of noise traders in the financial markets. In contrast to the previous literature,
financial contagion and international spillovers are considered in a two-country financial DSGE model. A
welfare analysis is performed and we show that the effects of the financial transaction tax on welfare are
non-linear and mainly depend on the composition of the financial market. In addition, introducing a
financial transaction tax allows volatility to be reduced in both the real and financial sectors, and this result
is robust to several model specifications. In a context where only one country implements the tax, we
identify some externalities, as the country with the tax is likely to export stability or instability through the
flows of traders. Like in the Heckscher-Ohlin-Samuelson (HOS) model in which capital and labor move
internationally when countries trade, we assume that there are trader flows when traders invest abroad. As
a consequence, noise traders can implicitly move to the foreign country to escape the tax, and this means
that countries have conflicting interests. When markets are liquid with a large proportion of noise traders,
countries do not internalise that they export noise traders and then some instability to the other market
and so they set a tax rate that is higher than the optimal. At the opposite end of the scale, when markets are
less liquid and the proportion of noise traders is small, some positive externalities (like financial stability)
are overlooked, and so the tax rate is set too low and is sub-optimal. A cooperative situation where countries
set a common tax rate is the best solution ans is welfare-enhancing. These results have important policy
implications, since the existence of the tax competition issues revealed by our two-country framework
might explain why the European Commission proposal initially discussed in 2011 is so contested and has
been rejected by several countries.
- JEL-Codes: E22, E44, E62
- Keywords: Financial Transaction Tax, DSGE, Welfare, Noise Traders, Tax coordination, EU tax project.
-
No. wp2021-7
(Download at EconPapers)
- Natalia Levenko and Karsten Staehr
- Tax compliance in post-transition:
You and your friends matter, not the government
This paper contributes to the literature that seeks to assess the importance of
various theories on tax evasion by individuals. The various theories can be
distinguished in detail using a very fine-grained survey of Estonian residents that
was collected in three rounds from 2018 to 2020. Principal component analysis
shows that the survey replies are mutually consistent and form distinct clusters that
match key theories on tax evasion. Logit estimations of tax compliance use the
principal components and various control variables as covariates. Theories of
individual rational choice do not gain support. Factors associated with personal
norms and with social norms and customs are important for tax compliance.
Importantly, theories of reciprocity that depict a positive relation between approval
of the government and tax compliance receive no support, possibly reflecting the
wide spread of views on the role of government in post-transition Estonia. Sample
splits reveal that the results apply broadly across various subsets of taxpayers. The
results of the principal component regressions are corroborated by logit estimations
where the survey variables enter individually
- JEL-Codes: H26, H83
- Keywords: tax evasion, monetary and non-monetary motives, auditing, behavioural choice, norms and customs, reciprocity
-
No. wp2021-6
(Download at EconPapers)
- Mathias Juust
- Trade effects of a negative export shock
on direct exporters and wholesalers
This paper examines the effects on the exports of Estonian firms of the Russian
export shock of 2014, which was a multifaceted negative market-wide income
shock. The dataset covers all the Estonian exporters that exported to Russia in 2013
and the empirical analysis uses a difference-in-difference method in combination
with the coarsened exact matching method to account for heterogeneities between
the treatment and control groups. I find that the wholesalers affected were able to
show better export performance after the shock than direct exporters were. The
trade performance after the shock was lower for both wholesalers and direct
exporters that had lower initial productivity levels
- JEL-Codes: F13, F14, F23
- Keywords: export shock, firm-level trade effects, trade effects, trade policy
-
No. wp2021-5
(Download at EconPapers)
- Eva Brandten
- The role of risk attitudes and expectations
in household borrowing in Estonia
This study investigates the relations between risk attitudes and expectations and
different aspects of borrowing by households in Estonia. The central research
question is whether risk aversion and optimism provide additional information
beyond the main economic and sociodemographic characteristics in explaining
borrowing behaviour. The paper uses microdata from the Estonian Household
Finance and Consumption Survey (HFCS) to estimate probit and Heckman models.
My analysis shows that risk-tolerant households apply for loans more often than
risk-averse households do and that their loans are larger. For mortgage loans, risk
aversion is related to the probability of having a loan, whereas for non-mortgage
loans, risk aversion is related to the size of the outstanding liabilities. The variables
describing the household’s expectations for its future financial situation are on their
own related to the decision to apply for a loan, but they do not contain any relevant
additional information beyond the main economic and sociodemographic
characteristics of the household
- JEL-Codes: G51, D14
- Keywords: household debt, mortgage loans, non-mortgage loans, borrowing decisions, income and price expectations, risk attitudes, Household Finance and Consumption Survey
-
No. wp2021-4
(Download at EconPapers)
- Jaanika Meriküll and Marina Tverdostup
- The gap that survived the transition:
the gender wage gap over three decades in Estonia
This paper looks at the gender wage gap throughout the transition from
communism to capitalism and throughout a time of rapid economic convergence.
The case of Estonia is used, and micro data from the Labour Force Survey from
1989 to 2020 are employed. The communist regimes had highly regulated wage
setting and high levels of educational attainment and labour market participation
for women. Although the regime was formally egalitarian, the gender attitudes were
conservative and the raw gender wage gap was as large as 41% at the end of the
communist period in Estonia. The large gender wage gap under communist rule
narrowed quickly during the first years of economic transition, but the further
decline in the gap has been slow. The paper has two main messages. The first is that
there is strong inertia in the gender wage gap persisting through the communist
period and economic convergence. None of the known long-run cultural drivers of
gender attitudes can explain this. The second is that the decline in the gap is related
to the overall decline in wage inequality, the rise in minimum wages, and more
egalitarian gender attitudes. The gender attitudes are responsible for a smaller effect
than wage inequality is.
- JEL-Codes: J31, J71, P23
- Keywords: gender wage gap, wage distribution, decomposition, post-communist economies, wage inequality, minimum wages, gender attitudes
-
No. wp2021-3
(Download at EconPapers)
- Anita Suurlaht
- The asymmetric effect of monetary policy on European financial markets
This paper analyses the impact of unanticipated changes in domestic and foreign monetary
policy on aggregate stock market performance and risk in ve countries: France, Germany,
Italy, Spain and the UK, using an event study methodology. We also study whether the
common monetary policy has the same impact in selected EU member states. We relate the
e ect of domestic and foreign monetary policy surprises on nancial markets to the
prevailing phase of the economic cycle and the state of market sentiment. Our results
suggest that during recessions and periods with low sentiment, unanticipated foreign
monetary policy contraction is associated with negative stock market returns and increased
nancial market risk. We nd that although there is asymmetry within the monetary policy
transmission to nancial markets within the EU, domestic monetary policy surprises have
little effect on stock returns and stock market risk, particularly during phases of economic
expansion and rising sentiment
- JEL-Codes: F36; F42; G15
- Keywords: Macro policy transmission; nancial markets; economic integration
-
No. wp2021-2
(Download at EconPapers)
- Nicolas Reigl
- Expectational errors and business cycle fluctuations in Europe
This paper investigates how supply noise and demand noise contribute
to business cycle fluctuations in three major European economies. A structural
vector autoregressive model is used to identify supply, demand, supply
noise and demand shocks. The identification scheme is built on nowcast
errors of output growth and the inflation rate that are derived from
the Consensus Economics Survey. The results indicate that positive supply
noise and positive demand noise shocks have an expansionary effect
on output but their magnitude differs across countries. The two shocks
contribute equally to business fluctuations and jointly they account for
around one quarter of the total variation in GDP in each of the three
countries.
- JEL-Codes: E31, E32, E58
- Keywords: Business cycles, noise shocks, SVAR, survey expectations
-
No. wp2021-1
(Download at EconPapers)
- Juan Carlos Cuestas, Merike Kukk and Natalia Levenko
- House price misalignments and economic growth in Europe
In this paper we investigate house price misalignments and their effect on the
real economy. We estimate the long-term relationship between house prices and the
fundamentals that determine long-term house prices for a panel of European
countries with dynamic OLS, using data from 20042018. We find that income has
been the main driver of house prices based on fundamentals in all countries, while
the supply of dwellings has calmed the rise in house prices in some countries. We
calculate house price misalignments, which are deviations of house prices from the
value based on fundamentals, and we employ them in the growth model. The results
of the growth regression indicate that house price imbalances amplify business
cycles in the short term, but in the long term house price overvaluations slow
economic growth down. The findings imply that it is crucial to take measures to
stabilise housing cycles
- JEL-Codes: E21, E44, R21, R31, G01
- Keywords: housing markets, fundamental house price, misalignments, imbalances, overvaluation, economic growth
-
No. wp2020-8
(Download at EconPapers)
- Tairi Room and Orsolya Soosaar
- The gender gap in pension wealth in Europe: Evidence from twenty countries
- JEL-Codes: D14, G23, G11, J32
- Keywords: retirement saving behaviour, voluntary retirement savings, mandatory retirement saving system, private pension wealth, gender gap, Europe
-
No. wp2020-7
(Download at EconPapers)
- Merike Kukk, Jaanika Merikyll and Tairi Room
- The gender wealth gap in Europe: A comparative study using a model averaging methodology
There is abundant evidence on the gender wage gaps across countries, but much
less is known about the gender differences in personal wealth. This paper provides
comparative estimates of the gender wealth gaps for 21 European countries,
employing data from the Household Finance and Consumption Survey. A common
problem for studies focusing on this topic is that the data on wealth are usually
provided at the household level and not at the individual level. This means it is only
possible to estimate gender wealth gaps for single-person households. To overcome
this constraint, we propose a novel approach using a model averaging methodology
to predict individualised wealth data for multi-person households. We find that the
gender wealth gaps tend to be in favour of men in the whole population, especially
when estimated at the top of the wealth distribution. In contrast, the estimated gaps
in the subset of single-person households tend to be statistically insignificant. The
country-level gender wealth gaps are correlated with overall wealth inequality but
not with gender gaps in pay and employment.
- JEL-Codes: D31, G51, J16, J71
- Keywords: gender gap, imputation, model averaging, wealth distribution, inequality, intra-household allocation of wealth, household finance, Europe
-
No. wp2020-6
(Download at EconPapers)
- Merike Kukk and Natalia Levenko
- Alternative financing and the non-performing loans of the corporate sector in Estonia
The paper investigates how much alternative options for corporate financing
have affected the quality of domestic corporate bank loans in Estonia. We use
quarterly data from 2004Q1�2019Q3 and three different methods to detect the
relationship between the non-performing corporate loans of domestic banks and
alternative sources of financing for firms. We find that a rise in intra-group
borrowing from parent companies is associated with an increase in overdue
corporate loans. There is also some evidence that foreign bank loans and trade credit
might be positively related to non-performing corporate loans. The results suggest
that a broader set of sources of corporate financing beyond domestic bank loans
should be considered when assessing the dynamics of the overdue corporate loans
of the domestic banking sector.
- JEL-Codes: G32, G34, C11, C14
- Keywords: corporate debt, non-performing loans, alternative financing, Bayesian model averaging, local projection method
-
No. wp2020-5
(Download at EconPapers)
- Nataliia Ostapenko
- Macroeconomic expectations: news sentiment analysis
I investigate the role that news sentiment plays in the macroeconomy. Using an approach
that combines Doc2Vec embedding and Latent Dirichlet Allocation with lexical-based models
I show that the news the media choose to report and the tone of these reports contain impor-
tant information for household unemployment, interest rates, and in
ation expectations. Topic
time series derived from the news and the sentiments they express are employed to estimate
how the news a ects the macroeconomy.
- JEL-Codes: E52, E31, E00
- Keywords: expectations, sentiment, news, Latent Dirichlet Allocation (LDA), Doc2Vec
-
No. wp2020-4
(Download at EconPapers)
- Karsten Staehr
- Export performance and capacity pressures in Central and Eastern Europe
This paper investigates whether various measures of capacity pressure or available
production capacity may help predict the dynamics of exports from the EU
countries in Central and Eastern Europe. The analysis uses annual panel data for
the 11 countries from 2001 to 2019. Reduced form estimations reveal that cost competitiveness
measures have little or no predictive power. The measures of capacity
pressure comprise capacity utilisation in industry, the unemployment rate and the
output gap, and the measures are all robust predictors of future export dynamics.
The results are robust to various changes in the time and country sample, control
variables and specification, and also hold in panel vector autoregressive models
- JEL-Codes: F14, F17, E32
- Keywords: export, competitiveness, capacity utilisation, output gap, unemployment, Central and Eastern Europe
-
No. wp2020-3
(Download at EconPapers)
- Orsolya Soosaar, Allan Puur and Lauri Leppik
- Does raising the pension age prolong working life?
Evidence from pension age reform in Estonia
We estimate how raising the statutory retirement age affects employment by
considering the pension age reform in Estonia, that gradually raised the normal
retirement age (NRA) for women from 58 to 61.5 and the early retirement age
(ERA) from 56 to 59.5 during the period of 2001 to 2011. The analysis employs a
difference-in-differences estimation strategy on register data covering women born
between 1943 and 1952. The reform did have an impact on the employment rate of
affected women, with an estimated increase of 4.1 percentage points associated with
the rise in the NRA, and 3.4 percentage points with the rise in the ERA. These
estimates are at the lower end of those found in previous studies for other countries,
pointing to the role of contextual features such as lower replace-ment rates and
fewer disincentives to work while drawing pensions.
- JEL-Codes: H31, H55, J14, J26
- Keywords: retirement age, older workers, employment
-
No. wp2020-2
(Download at EconPapers)
- Natalia Levenko
- Elevated survey uncertainty after the Great Recession:
a non-linear approach
The European Survey of Professional Forecasters (SPF) is a dataset that is
widely used to derive measures of forecast uncertainty. Participants in the SPF
provide not only point estimates but also density forecasts for key macroeconomic
variables. The mean individual variance, defined as the average of the variances
of individual forecasts, shifted up during the Great Recession and has remained
elevated since the crisis. This shift is not typical since proxies for uncertainty are
usually counter-cyclical. The paper seeks to explain this puzzling lack of countercyclicality
by applying a smooth transition analysis on data from the European
SPF. The analysis indicates that the mean individual variance has a non-linear relationship
with the share of non-rounded responses in the survey and consequently
the upward shift in individual variance is likely to be associated with changes in
the modelling preferences of forecasters. The results remain robust after potential
endogeneity has been accounted for
- JEL-Codes: C25, C32, C83, D81, E32, E37
- Keywords: survey uncertainty; forecast disagreement; density forecasts; surveys of professional forecasters; Great Recession; smooth transition; instrumental variables
-
No. wp2020-1
(Download at EconPapers)
- Merike Kukk and W. Fred van Raaij
- Joint and individual savings within families:
evidence from bank accounts
In this paper, we investigate the ownership of financial assets within families
and how pooling affects the individual savings of the partners. We use anonymised
monthly transactional data from ING Bank to observe the financial data of
Dutch couples for 20142016. We find that savings are quite equally allocated in
almost half of households but in one-fifth of households there is only one partner
who owns an individual account. The estimations show that joint savings contribute
to a more equal division of savings since they are held equally. However, we
find larger differences in individual savings among partners who pool, suggesting
that the use of joint savings does not lead to individual savings being more evenly
distributed, but rather to the opposite. The pattern is more apparent for households
in their 20s and for saving accounts. The results of the study highlight the need to
understand how families make decisions about applying the sharing rule to joint
and individual savings
- JEL-Codes: G51, D13, D14, D31
- Keywords: household, savings, financial assets, financial management, allocation of resources in households, sharing rule, pooling, joint and separate/ individual assets, bank and savings accounts
-
No. wp2019-9
(Download at EconPapers)
- Remi Generoso, Cécile Couharde and Olivier Damette
- The effects on growth of El Nino and La Nina:local weather conditions matter
This paper contributes to the climate-economy literature by analysing
the role of weather patterns in in
uencing the transmission of global climate
cycles to economic growth. More speci cally, we focus on El Ni~no Southern
Oscillation (ENSO) events and their interactions with local weather
conditions, taking into account the heterogeneous and cumulative e ects of
weather patterns on economic growth and the asymmetry and nonlinearity
in the global in
uence of ENSO on economic activity. Using data on 75
countries over the period 1975{2014, we provide evidence for the negative
growth e ects of ENSO events and show that there are substantial
di erences between its warm (El Ni~no) and cold (La Ni~na) phases and
between climate zones. These di erences are due to the heterogeneity in
weather responses to ENSO events, known as teleconnections, which has so
far not been taken into account by economists, and which will become more
im-portant in the climate-economy relationship given that climate change
may substantially strengthen long-distance relationships between weather
patterns around the world. We also show that the negative growth e ects
associated with these teleconnections are robust to the de nition of ENSO
events and more important over shorter meteorological onsets
- JEL-Codes: C33, O40, Q54
- Keywords: economic growth, ENSO events, weather shocks, climate change
-
No. wp2019-8
(Download at EconPapers)
- Dmitry Kulikov and Nicolas Reigl
- Inflation expectations in Phillips Curves models for the euro area
This paper takes a fresh look at the use of the Phillips curve and various in
ation
expectation proxies for tracking euro area in
ation dynamics in the aftermath of
the global nancial crisis of 2008. Because in
ation expectations can be measured
in a multitude of alternative ways and the Phillips curve model itself is subject to
many potential speci cation choices, we employ a novel thick modelling perspective
that is data and model-agnostic and estimate a large number of di erent Phillips
curve models using di erent data series for di erent components of our models. We
nd that Phillips curve models without any forward-looking expectational terms
are uniformly the worst predictors of euro area in
ation rates after 2013, when
measured for the RMSE criterion across all models and speci cations. This result
underlines the importance of in
ation expectations in tracking the recent dynamics
of euro area in
ation and shows that in
ation persistence alone or in combination
with di erent slack and cost push terms cannot satisfactorily explain the euro
area in
ation story during the period of missing in
ation after 2012. We also
illustrate the usefulness of the thick modelling approach for practical modelling
and forecasting of the euro area in
ation series.
- JEL-Codes: E31, E37, E58, C13, C15, C52
- Keywords: data-rich models, thick modelling, data and model uncertainty, Phillips curve, in ation expectations, in ation dynamics, euro area
-
No. wp2019-07
(Download at EconPapers)
- Juan Carlos Cuestas
- On the evolution of competitiveness
in Central and Eastern Europe: is it broken?
In this paper we aim to analyse the evolution of the real exchange rate (RER)
as a measure of competitiveness for a group of Central and Eastern European
countries. To do so, we apply unit root tests with breaks and estimate equations
with structural breaks. The results show that even though RERs have become
flatter, which means less competitiveness is lost against main trading partners,
they have become less mean reverting, meaning that shocks now tend to have
longer effects. Policy conclusions are derived from this analysis
- JEL-Codes: C22, F15
- Keywords: real exchange rates, Central and Eastern Europe, structural breaks, European integration
-
No. wp2019-06
(Download at EconPapers)
- Merike Kukk and Natalia Levenko
- Macroeconomic imbalances and loan quality
in panels of European countries
The paper investigates the relationship between loan quality and macroeconomic
imbalance indicators. We use the local projection method to estimate
the response of non-performing loans (NPL) to changes in the cyclical component
of macroeconomic factors. The estimations are run for three country groups of
Western European countries, Central and Eastern European countries, and Southern
European countries. The results show that a rise in the output gap is followed
by a rise in NPL in all country groups, while NPL responds to the unemployment
rate in the Central and Eastern and Southern European countries. Inflation and
real unit labour costs are positively related to NPL in all country groups, though
they are estimated with large uncertainty in some country groups. The findings
suggest that it is useful to monitor imbalances in the output gap, unemployment,
inflation and labour costs together with credit indicators to assess the ensuing dynamics
in NPL.
- JEL-Codes: E32, E44, G21, P52
- Keywords: non-performing loans, macroeconomic imbalances, cyclical component, local projection method, unit labour costs
-
No. wp2019-05
(Download at EconPapers)
- Jaanika Merikull and Tairi Room
- Are survey data underestimating the inequality of wealth?
This paper uses administrative data from registers and survey data from interviews
to analyse unit and item non-response in a wealth survey. It draws on the
Estonian Household Finance and Consumption Survey dataset, where the survey
data on income and wealth are complemented by information on the same variables
from administrative sources for all the people sampled. The results show
that the non-response contributes to the underestimation of wealth inequality in
the survey data, as the Gini coefficient is underestimated by 6 percentage points
and also the top wealth shares are substantially underestimated. The downward
bias is originating from item non-response and not from unit non-response. Imputation
can address the problems caused by item non-response across most of the
net wealth distribution, but does not eliminate the downward bias at the top of the
wealth distribution.
- JEL-Codes: D31, E21
- Keywords: wealth distribution, unit non-response, item non-response, participation bias, wealth survey, income survey, Household Finance and Consumption Survey, Estonia
-
No. wp2019-04
(Download at EconPapers)
- Jaanika Merikull, Merike Kukk and Tairi Room
- What explains the gender gap in wealth? Evidence from administrative data
This paper studies the gender gap in net wealth. We use administrative data on
wealth that are linked to the Estonian Household Finance and Consumption
Survey, which provides individual-level wealth data for all household types. We
find that the unconditional gender gap in mean wealth is 45% and that it is caused
by large wealth disparities in the upper end of the wealth distribution. The structure
of assets owned by men is more diversified than that for women. Men own
more business assets and vehicles, while women own more deposits. The gender
gaps in these asset components cannot be explained by observable characteristics.
For partner-headed households the raw gender gaps across deciles are mostly in
favour of men, and more strongly so for married couples, indicating that resources
are not entirely pooled within households. For single-member households the raw
gaps across quantiles are partially in favour of women. Accounting for observable
characteristics renders the unexplained parts of the gaps mostly insignificant for
all household types
- JEL-Codes: D31, J16, J71
- Keywords: gender gap, wealth, inequality, intra-household allocation of wealth, Estonia
-
No. wp2019-03
(Download at EconPapers)
- Juan Carlos Cuestas, Nicolas Reigl and Yannick Lucotte
- The evolution and heterogeneity of credit
procyclicality in Central and Eastern Europe
This paper presents empirical estimates of bank credit procyclicality
for a sample of 11 Central and Eastern Europe countries (CEECs) for the
period 2000Q1–2016Q4. In the first step we estimate a traditional-type
panel VAR model and analyse the evolution of credit procyclicality in the
CEECs by comparing the impulse response functions for different business
cycle periods. The results confirm the existence of credit procyclicality
in CEECs and show that procyclicality is higher during boom periods.
Furthermore we observe the heterogeneity of credit procyclicality in the
different countries in our sample. To explain the cross-country heterogeneity
in credit procyclicality we construct an interacted panel VAR model
(IPVAR) and analyse whether bank level competition, proxied by the aggregate
Lerner index, constitutes a driving force of credit procyclicality.
Our findings indicate that bank competition affects credit procyclicality
and explains the differences in credit dynamics across CEECs. Specifically
we show that the reaction of credit to a GDP shock is on average higher
in a less competitive banking market.
- JEL-Codes: E32, E51, G20, D40, C33
- Keywords: credit cycle, business cycle, bank competition, interacted panel VAR, CEEC
-
No. wp2019-02
(Download at EconPapers)
- Thomas Y. Mathä, Stephen Millard and Tairi Room
- Shocks and labour cost adjustment:
evidence from a survey of European firms
We use firm-level survey data from 25 EU countries to analyse how firms
adjust their labour costs (employment, wages and hours) in response to shocks.
We develop a theoretical model to understand how firms choose between different
ways to adjust their labour costs. The basic intuition is that firms choose the
cheapest way to adjust labour costs. Our empirical findings are in line with the
theoretical model and show that the pattern of adjustment is not much affected by
the type of the shock (demand shock, access-to-finance shock, “availability of
supplies” shock), but differs according to the direction of the shock (positive or
negative), its size and persistence. In 2010–2013, firms responding to negative
shocks were most likely to reduce employment, then hourly wages and then hours
worked, regardless of the source of the shock. Results for the 2008–2009 period
indicate that the ranking might change during deep recession as the likelihood of
wage cuts increases. In response to positive shocks in 2010–2013, firms were
more likely to increase wages, followed by increases in employment and then
hours worked suggesting an asymmetric reaction to positive and negative shocks.
Finally, we show that strict employment protection legislation and high centralisation
or coordination of wage bargaining make it less likely that firms reduce
wages when facing negative shocks.
- JEL-Codes: D21, D22, D24
- Keywords: shocks, firms, labour cost adjustment, wages, employment, hours, survey
-
No. wp2019-01
(Download at EconPapers)
- Jacopo Bonchi
- Asset price bubbles with low interest rates:
not all bubbles are alike
I extend a standard two-period OLG model to investigate the interplay between
the risks of a binding zero lower bound and asset price bubbles in a low interest rates
environment. The nature of the bubble is crucial when the risk-free real interest rate
is low because there is a negative natural interest rate. Bubbles are fully leveraged
when they are sustained by borrowers, or they are fully unleveraged when they are
sustained by lenders. Leveraged bubbles emerge naturally when there is a negative
natural interest rate, and they are more likely to collapse. Unleveraged bubbles
appear, in contrast, if the natural rate of interest is extremely low and the probability
of the bubble bursting is not extremely high. Both bubbles are more likely to emerge
with a high inflation target and will potentially be larger, but only leveraged bubbles
substantially mitigate the risk of a zero lower bound episode by raising the natural
rate of interest
- JEL-Codes: E43, E44, E52
- Keywords: zero lower bound, low interest rates, asset price bubbles, inflation target
-
No. wp2018-10
(Download at EconPapers)
- Tibor Lalinsky and Jaanika Merikull
- The effect of the single currency on exports:
comparative firm-level evidence
We investigate how adopting the euro affects exports using firm-level data
from Slovakia and Estonia. In contrast to previous studies, we focus on countries
that adopted the euro individually and had different exchange rate regimes prior to
doing so. Following the New Trade Theory we consider three types of adjustment:
firm selection, changes in product varieties and changes in the average value of
the exports that compose the exports of individual firms. The euro effect is identified
by a difference in differences analysis comparing exports by firms to the euro
area countries with exports to the EU countries that are not members of the euro
area. The results highlight the importance of the transaction costs channel related
to exchange rate volatility. We find the euro has a strong pro-trade effect in Slovakia,
which switched to the euro from a floating exchange rate, while it has almost
no effect in Estonia, which had a fixed exchange rate to the euro prior to the euro
changeover. Our findings indicate that the euro effect manifested itself mainly
through the intensive margin and that the gains in trade were heterogeneous across
firm characteristics.
- JEL-Codes: F14, F15
- Keywords: international trade, common currency areas, euro adoption, transaction costs, Slovakia, Estonia, firm-level data
-
No. wp2018-09
(Download at EconPapers)
- Natalia Levenko
- Actual and perceived uncertainty
as drivers of household saving
- JEL-Codes: E12, E21, E24
- Keywords: household saving rates, European Union, financial crisis, labour income uncertainty, precautionary saving, unemployment, consumer expectations, system GMM
-
No. wp2018-08
(Download at EconPapers)
- Kersti Harkmann and Karsten Staehr
- Current account dynamics and
exchange rate regimes in Central and Eastern Europe
The paper seeks to determine the factors that drive the current
account dynamics of the 11 EU members from Central and Eastern
Europe (CEE). Panel data models are estimated on annual data
for the period 1997–2017 and both domestic pull factors and
external push factors are included. The models are, as a key innovation,
estimated separately for floating and fixed exchange rate
regimes. The current account exhibits substantial persistence in
both cases. For the floaters, the current account has been driven
by domestic factors while external factors appear unimportant.
For the fixers, the current account has mainly been driven by external
factors, suggesting there is substantial vulnerability to external
developments. The analysis underscores the importance of
the exchange rate regime for the drivers of the current account
balance in the CEE countries.
- JEL-Codes: F32, F33, P33
- Keywords: current account balance, exchange rate regime, economic policies, Central and Eastern Europe
-
No. wp2018-07
(Download at EconPapers)
- Nicolas Reigl and Lenno Uuskula
- Alternative frameworks for measuring credit gaps and
setting countercyclical capital buffers
This paper complements the standard Basel countercyclical capital buffer
framework by suggesting four additional measures for credit gaps that can be used
to measure the financial cycle and to decide on countercyclical capital buffers for
banks. The new measures behave similarly to the gaps calculated with the
standard Basel one-sided Hodrick-Prescott filter in long samples, but they have
the properties desired for countries with relatively short historical samples. While
the standard Basel credit gaps have been deep in negative territory for many
European Union countries since the Great Recession the new gaps are close to
zero and the buffers suggested are more in line with the countercyclical capital
buffer ratios that were in place in 2018.
- JEL-Codes: G01, E59
- Keywords: credit gaps, countercyclical capital buffer, Basel III, Estonia
-
No. wp2018-06
(Download at EconPapers)
- Juan Carlos Cuestas
- Changes in sovereign debt dynamics
in Central and Eastern Europe
The aim of this paper is to shed some light on the degree of sustainability
of fiscal debt for a group of Central and Eastern European countries. We apply
a battery of time series econometrics methods to show how the financial crisis has
affected the debt-to-GDP ratio and how the ratio has behaved recently. The results
give us important insights into how governments in Central and Eastern Europe
have reacted to the accumulation of debt. We distinguish between two groups of
countries; one group where the sovereign debt stock stabilised after the crisis, and
another where debt has been accumulated more quickly in recent years. The
results provide important policy lessons for the authorities responsible
- JEL-Codes: C22, F15
- Keywords: Central and Eastern Europe, structural breaks, European integration
-
No. wp2018-05
(Download at EconPapers)
- Juan Carlos Cuestas, Estefania Mourelle and Paulo José Regis
- Real exchange rate misalignments in CEECs:
have they hindered growth?
We study the impact of exchange rate misalignment on economic activity in
nine Central and Eastern European (CEE) economies. Exchange rate misalignments
are computed from country-specific long-run exchange rate relationships
with determinants suggested by open macroeconomic models such as interest rate
differentials or the Balassa-Samuelson effect. There was a clear reduction in
misalignments, but this has been reversed to some extent after 2008. Exchange
rate overvaluation has a negative impact on economic activity. The effect of misalignments
on economic activity seems to be nonlinear, as overvaluation has a
stronger effect than undervaluation. Other factors of economic activity, including
institutions, also show nonlinear effects
- JEL-Codes: O11, F41, F15
- Keywords: real exchange rate misalignments, growth, Central and Eastern European countries, panel smooth transition regression
-
No. wp2018-04
(Download at EconPapers)
- Merike Kukk, Alari Paulus and Karsten Staehr
- Income underreporting by the self-employed in Europe:
a cross-country comparative study
This study is the first to provide comparative estimates of the extent of income
underreporting by the self-employed across countries in Europe. The estimates are
derived using the consumption method developed by Pissarides & Weber (1989)
and the data from the 2010 wave of the harmonised EU Household Budget Survey.
The estimations show that the share of income not reported by the selfemployed
is relatively large in many European countries, although with substantial
variation across the countries. There is some regional clustering, but the
shares of underreporting appear not to be related to the development level of the
countries. The results are robust to changes in the model specification, the
estimation method, and the choice of instruments, but are somewhat sensitive to
sample restrictions and the criterion used to define self-employed households
- JEL-Codes: H26, E21, E26, H24
- Keywords: ncome underreporting, self-employment, EU countries, household budget surveys
-
No. wp2018-03
(Download at EconPapers)
- Eva Branten, Ana Lamo and Tairi Room
- Nominal wage rigidity in the EU countries
before and after the Great Recession:
evidence from the WDN surveys
This paper studies the recent trends in nominal wage rigidity in a large group of
EU countries, using survey data. We analyse two forms of nominal wage rigidity:
downward nominal wage rigidity (DNWR) and the lagged response of wages to
shocks. The frequency of wage changes, which is an indicator of lagged wage
setting, slowed down in the aftermath of the Great Recession. We assess the possible
reasons for this, and show that it was at least partially caused by a combination
of a decline in average wage growth and persistent DNWR. In countries
where wage growth slowed down more after the Great Recession, the frequency
of wage changes declined more steeply as well. Our data allows evaluating the
prevalence of DNWR in diverse economic circumstances. Like earlier research on
this topic, we find that DNWR tends to be strongly prevalent, even in periods of
slow economic growth and low wage inflation. DNWR declines during severe
recessions but even then wage setting does not become completely flexible as the
proportion of observed wage cuts is still below the level that would correspond to
a flexible regime.
- JEL-Codes: B41, D22
- Keywords: downward nominal wage rigidity, wage change frequency, survey
-
No. wp2018-02
(Download at EconPapers)
- Wenjuan Chen and Aleksei Netsunajev
- Structural vector autoregression with time varying transition probabilities: identifying uncertainty shocks via changes in volatility
- JEL-Codes: C32, D80, E24
- Keywords: structural vector autoregression; Markov switching; time varying transition probabilities; identification via heteroscedasticity; uncertainty shocks; unemployment dynamics
-
No. wp2018-01
(Download at EconPapers)
- Sang-Wook (Stanley) Cho and Julian P. Daz
- Skill premium divergence:
the roles of trade, capital and demographics
We construct an applied general equilibrium model to account for diverging patterns
of the skill premium. Our framework assesses the roles of various factors that a ect
the demand and supply of skilled and unskilled labor|shifts in the skill composition of
the labor supply, changes in the terms of trade and the complementarity between skilled
labor and equipment capital in production. We nd that increases in the relative skilled
labor supply due to demographic changes lead to a decline in the skill premium, while
equipment capital deepening raises the relative demand for skilled labor which in turn
increases the skill premium. In addition, terms of trade changes lead to the reallocation
of resources towards sectors in which countries enjoy comparative advantages. Since our
model incorporates multiple factors simultaneously, it can generate either rising or falling
skill premium paths. When we parametrize the model to the Baltic states|countries that
were similar along many dimensions at the onset of their transition from centrally-planned
to market-oriented economies|our model can closely account for the diverging patterns
of skill premia for the period between 1995 and 2008.
- JEL-Codes: E16, E25, J24, J31
- Keywords: skill premium, international trade, capital-skill complementarity, demographic change, Baltic state
-
No. wp2017-9
(Download at EconPapers)
- Aurélien Leroy and Yannick Lucotte
- Competition and credit procyclicality in European banking
This paper empirically assesses the effects of competition in the financial sector
on credit procyclicality by estimating both an interacted panel VAR (IPVAR)
model using macroeconomic data and a single-equation model with bank-level European
banking data. The findings of these two empirical approaches highlight
that an exogenous deviation of actual GDP from potential GDP leads to greater
credit fluctuation in economies where both competition among banks and competition
from non-bank financial institutions or direct finance (proxied by the fi-
nancial structure) are weak. According to the financial accelerator theory, if lower
competition strengthens the cyclical behavior of financial intermediaries, it follows
that these "endogenous developments in credit markets work to amplify and
propagate shocks to the macroeconomy" (Bernanke et al., 1999). Furthermore,
since credit booms are closely associated with future financial crises (Laeven and
Valencia, 2012), our results can also be read as evidence that greater competition
in the financial sphere reduces financial instability, which is in line with the
competition-stability view denying the existence of a trade-off between competition
and stability
- JEL-Codes: E32, E51, G20, D40, C33
- Keywords: credit cycle, business cycle, bank competition, interacted panel VAR
-
No. wp2017-8
(Download at EconPapers)
- Natalja Levenko, Kaspar Oja and Karsten Staehr
- Total factor productivity growth in Central and Eastern Europe before, during and after the Global Financial Crisis
This paper conducts growth accounting for 11 EU countries from Central and
Eastern Europe for the years 1996–2016. Its contributions include the estimation
of new capital stock series, adjustment for the utilisation of the capital stock and a
time-varying elasticity of output to capital. Before the crisis, growth in total factor
productivity (TFP) was the main contributor to output growth in Slovenia,
Hungary and Slovakia, while capital deepening was more important in the Czech
Republic, Croatia and Poland. During the global financial crisis the contributions
of TFP and capital growth differed markedly across the countries, reflecting the
very diverse dynamics of the crisis. After the crisis the contribution of TFP
growth has been negligible in all of the sample countries coinciding with generally
weak output growth. The results are generally robust to changes in estimation
methods and parametrisations, but some assumptions are critical for the results.
- JEL-Codes: F43, O47
- Keywords: growth accounting, capital stock, perpetual inventory method, total factor productivity, global financial crisis, Central and Eastern Europe
-
No. wp2017-7
(Download at EconPapers)
- Cuestas, Juan Carlos, Lucotte, Yannick and Reigl, Nicolas
- Banking sector concentration, competition and financial stability: the case of the Baltic countries
This paper empirically assesses the potential nonlinear relationship between
competition and bank risk for a sample of commercial banks in the
Baltic countries over the period 2000–2014. Competition is measured by
two alternative indexes, the Lerner index and the market share, while we
consider the Z-score and loan loss reserves as proxies for bank risk. In line
with the theoretical predictions of Martinez-Miera and Repullo (2010), we
find an inverse U-shaped relationship between competition and financial
stability. This then means that above a certain threshold, the lack of
competition is likely to exacerbate the individual risk-taking behaviour of
banks, and could be detrimental to the stability of the banking sector in
the Baltic countries. The threshold is around 0.60 for the Lerner index,
and close to 50% for market share in terms of assets. The policy implications
are that the existence of such a threshold suggests that the future
evolution of the the structure of the banking industry in these countries is
of critical importance. Specifically, this implies that policy-makers should
place greater emphasis on mergers and acquisitions to avoid any significant
increase of banking sector concentration
- JEL-Codes: G21, G28, G32, L51
- Keywords: bank competition, banking sector concentration, market power, Lerner index, financial stability, bank-risk taking, Baltic countries
-
No. wp2017-6
(Download at EconPapers)
- Guender, Alfred V.
- Credit prices vs. credit quantities as predictors of economic activity in Europe: which tell a better story?
This paper examines the role of credit providers in the EMU and assesses the
effects of credit spreads and credit quantities on economic activity. Movements in
credit spreads are far more successful than movements in the external finance mix
in predicting near-term changes in real economic activity in ten EMU countries.
However, the forecasting performance of the three credit spreads evaluated in this
paper is uneven. A risk premium extracted from individual corporate bond yields
predicts three measures of economic activity fairly well in Germany and Southern
Europe. Two other credit spreads, the ‘spread’ and the ‘ECB-spread’, have predictive
power for some measures of economic activity but they fail to predict
consistently across either a range of economic indicators or countries
- JEL-Codes: E3, E4, G1
- Keywords: credit spreads, finance mix, bank vs open market debt, economic activity, financial crises
-
No. wp2017-5
(Download at EconPapers)
- Kholodilin, Konstantin A. and Netsunajev, Aleksei
- Crimea and punishment: the impact of sanctions on Russian and European economies
The conflict between Russia and Ukraine that started in March 2014 led to bilateral
economic sanctions being imposed on each other by Russia and Western countries, including
the members of the euro area. The paper investigates the impact of the sanctions on
the real side of the economies of Russia and the euro area. The effects of sanctions are
analysed with a structural vector autoregression. To pin down the effect we are interested
in, we include in the model an index that measures the intensity of the sanctions. The
sanction shock is identified and separated from the oil price shock by narrative sign restrictions.
We find a very high probability that Russian GDP declined as a result of the
sanctions. In contrast to that, the effects of the sanctions on the euro area are limited to
real effective exchange rate adjustments
- JEL-Codes: C32, F51
- Keywords: political conflict; sanctions; economic growth; Russia; euro area; structural vector autoregression
-
No. wp2017-4
(Download at EconPapers)
- Tairi Room and Jaanika Merikull
- The financial fragility of Estonian households: Evidence from stress tests on the HFCS microdata
This paper analyses the financial fragility of the Estonian household sector using microdata from the Household Finance and Consumption Survey (HFCS). We use a stress-testing framework where the probability of default is evaluated on the basis of the financial margin (i.e. the ability to service debt from current income) and the availability of financial buffers. The HFCS data from household interviews are complemented with information from administrative registers. This lets us evaluate and compare measures of financial vulnerability that draw on data from different sources. We derive a set of indicators to identify households that are financially distressed and analyse the sensitivity of financial sector loan losses to adverse shocks. The stress-test elasticities are assessed separately for three standardised negative macroeconomic shocks: a rise in interest rates, an increase in the unemployment rate, and a fall in real estate prices. In addition, we evaluate the impact of a simultaneous shock mimicking the dynamics of these three variables during the Great Recession. It is found that: (1) despite there being a lot of households with financial difficulties, the risks for banks from the household sector are limited; (2) financial fragility is strongly negatively related to income; (3) the loan default rate of households is most sensitive to shocks to the unemployment rate and the interest rate, while the loan losses of banks are affected most by real estate price shocks; and (4) compared with the survey data, the information collected from administrative sources points to higher household default rates and larger bank losses.
- JEL-Codes: D14,E43
- Keywords: household financial fragility, stress-testing, household finance and consumption survey, Estonia, measurement error in household surveys
-
No. wp2017-3
(Download at EconPapers)
- Gregory Levieuge, Yannick Lucotte and Florian Pradines-Jobet
- Central banks preferences and banking sector vulnerability
According to "Schwartz’s conventional wisdom" and what has been called "divine coincidence", price stability should imply macroeconomic and financial stability. However, in light of the recent financial crisis, with monetary policy focused on price stability, scholars have held that banking and financial risks were largely unaddressed. According to this alternative view, the belief in divine coincidence turns out to be benign neglect. The objective of this paper is to test Schwartz’s hypothesis against the benign neglect hypothesis. The priority assigned to the inflation goal is proxied by the central banks’ conservatism (CBC) index proposed by Levieuge and Lucotte (2014b), here extended to a large sample of 73 countries from 1980 to 2012. Banking sector vulnerability is measured by six alternative indicators that are frequently employed in the literature on early warning systems. Our results indicate that differences in monetary policy preferences robustly explain cross-country differences in banking vulnerability and validate the benign neglect hypothesis, in that a higher level of CBC implies a more vulnerable banking sector
- JEL-Codes: E3; E44; E52; E58
- Keywords: central banks preferences, inflation aversion, banking sector vulnerability, monetary policy
-
No. wp2017-2
(Download at EconPapers)
- Juan Carlos Cuestas and Merike Kukk
- Asymmetries in the interaction between housing prices and housing credit in Estonia
This paper investigates the mutual dependence between housing prices and housing credit in Estonia, a country which experienced rapid debt accumulation during the 2000s and big swings in house prices during that period. We use Bayesian econometric methods on data spanning 2000–2015. The estimations show the interdependence between house prices and housing credit. More importantly, housing credit shocks had a stronger effect on house prices in the period of declining credit turnover. The asymmetry in the linkage between housing credit and house prices highlights important policy implications, in that if central banks increase capital buffers during good times, they can release credit conditions during hard times to alleviate the negative spillover into house prices and the real economy
- JEL-Codes: E32, E44, E51, G21, R21, R31
- Keywords: house prices, housing credit, credit cycle, asymmetries, Bayesian
-
No. wp2017-12
(Download at EconPapers)
- Liina Malk, Katalin Bodnar, Ludmila Fadejeva, Stefania Iordache, Desislava Paskaleva , Jurga Pesliakaitė, Nataša Todorović Jemec, Peter Tóth and Robert Wyszyński
- How do firms adjust to rises in the minimum wage? Survey evidence from Central and Eastern Europe
We study the transmission channels for rises in the minimum wage using a
unique firm-level dataset from eight Central and Eastern European countries.
Representative samples of firms in each country were asked to evaluate the
relevance of a wide range of adjustment channels following specific instances of
rises in the minimum wage during the recent post-crisis period. The paper adds to
the rest of literature by presenting the reactions of firms as a combination of
strategies, and evaluates the relative importance of those strategies. Our findings
suggest that the most popular adjustment channels are cuts in non-labour costs,
rises in product prices, and improvements in productivity. Cuts in employment is
less popular and occurs mostly through reduced hiring rather than direct layoffs.
Our study also provides evidence of potential spillover effects that rises in the
minimum wage can have on firms without minimum wage workers.
- JEL-Codes: D22, E23, J31
- Keywords: minimum wage, adjustment channels, firm survey
-
No. wp2017-11
(Download at EconPapers)
- Theologos Dergiades, Costas Milas and Theodore Panagiotidis
- An assessment of the inflation targeting experience
An effective inflation targeting (IT) regime assumes both a change in the stationarity
properties of inflation and a lower variability. Within a framework that does not make a
priori assumptions about the order of integration, we examine whether there is a change
in the inflation persistence in forty-five, developed and developing, countries and in
three groups of countries, the G7, the OECD, and OECD Europe. For the inflation
targeters, we find that the endogenously identified break dates are not consistent with
the formal adoption of the IT regime. We employ a test for the variability of inflation
that tracks how frequently inflation variability is in control. Logit analysis reveals that
inflation targeters do not experience a greater probability than non-inflation targeters of
inflation persistence changing, and they are not more in control of their inflation
variability. The quality of institutions emerges as being more significant for taming
inflation
- JEL-Codes: C12, E4, E5
- Keywords: structural change, persistence change, inflation targeting
-
No. wp2017-10
(Download at EconPapers)
- Karsten Staehr and Lenno Uuskula
- Forecasting models for non-performing loans in the EU countries
This paper estimates panel data models that use macroeconomic and macrofinancial
variables to forecast the ratio of non-performing loans to total loans.
The panels consist of either all EU countries or various subgroups, and the
time sample is 1997Q4 to 2017Q1. The estimations show that macroeconomic
and macro-financial variables have important roles in forecasting nonperforming
loans. The ratio of non-performing loans exhibits substantial
persistence and higher GDP growth, lower inflation and lower debt are robust
leading indicators of the ratio of lower non-performing loans. The current
account balance and real house prices are important indicators for Western
Europe but are less important for Central and Eastern Europe
- JEL-Codes: E44, E47, G21
- Keywords: non-performing loans, forecasting, financial stability
-
No. wp2017-1
(Download at EconPapers)
- Barry Eichergreen
- Ragnar Nurkse and the international financial architecture
World-renowned economist, Professor of Economics at the University of California, and the author of several books on international economy and the monetary system, Barry Eichengreen, gave the 2017 Ragnar Nurkse memorial lecture entitled Ragnar Nurkse and the International Financial Architecture. The lecture was held at Eesti Pank on January 12th 2017.
In his lecture, Professor Eichengreen gave an overview of Ragnar Nurkse’s book International Currency Experience: Lessons of the Inter-War Period that was published in 1944 and discussed whether the conclusions of the book still hold true today.
The 2017 Ragnar Nurkse memorial lecture was held in honour of the 110th birth anniversary of the Estonian economist who achieved global recognition in the 1940s and 1950s. His research on monetary policy issues, international trade, international policy coordination, and development economics has provided valuable information, lessons, and guidelines. Eesti Pank started the regular lecture series dedicated to Ragnar Nurkse in 2007
-
No. wp2016-9
(Download at EconPapers)
- Merike Kukk
- What are the triggers for arrears on debt? Evidence from quarterly panel data
The paper investigates the triggers of arrears on debt in Estonia, which is a full
recourse country similar to other euro area countries. An extensive individuallevel
quarterly panel dataset enables quarterly debt repayment problems to be
tracked while controlling for individual specific heterogeneity. The estimations
show that lower income and higher debt service ratios are associated with a higher
probability of arrears, confirming the “ability to pay” hypothesis. Newly taken
consumer loans increase the probability of arrears and the relationship is stronger
for loans granted during a recession when credit conditions were tight. Newly
taken housing loans exhibit a lower probability of arrears and the same applies to
loans granted during the period of easy credit conditions and high real estate
prices. The results suggest that the most efficient measures for addressing arrears
on debt would be those that mitigate income declines and the debt servicing
burden
- JEL-Codes: D12, D14, G21
- Keywords: arrears, income decline, the debt service ratio, housing loans, consumer loans
-
No. wp2016-8
(Download at EconPapers)
- Nicolas Reigl
- Forecasting the Estonian rate of inflation using factor models
The paper presents forecasts of the headline and core inflation in Estonia with factor models in a recursive pseudo out-of-sample framework. The factors are constructed with a principal component analysis and are then incorporated into vector autoregressive forecasting models. The analyses show that certain factor-augmented vector autoregressive models improve upon a simple univariate autoregressive model but the forecasting gains are small and not systematic. Models with a small number of factors extracted from a large dataset are best suited for forecasting headline inflation. In contrast models with a larger number of factors extracted from a small dataset outperform the benchmark model in the forecast of Estonian headline and, especially, core inflation
- JEL-Codes: C32, C38, C53
- Keywords: Factor models, factor-augmented vector autoregressive models, factor analysis, principal components, inflation forecasting, forecast evaluation, Estonia
-
No. wp2016-7
(Download at EconPapers)
- Lenno Uuskula
- Monetary transmission mechanism
with firm turnover
An expansionary monetary policy shock increases the entry rate and the number
of firms in the US. A pure sticky price model predicts that the number of firms in
the economy should go down after a monetary expansion, but this prediction is at
odds with the empirical findings. In marked contrast, the cost channel mechanism
generates an increase in the number of firms that is consistent with the data. A key
insight is that the greater price stickiness is, the stronger the cost channel needs to
be to generate firm dynamics that are consistent with the data.
- JEL-Codes: E32, C32
- Keywords: monetary transmission, cost channel, sticky prices, firm turnover
-
No. wp2016-6
(Download at EconPapers)
- Simona Ferraro, Jaanika Merikull and Karsten Staehr
- Minimum wages and the wage distribution in Estonia
This paper analyses how the statutory minimum wage has affected the wage distribution in Estonia, a country with virtually little collective bargaining and relatively large wage inequality. The computations follow Lee (1999) but the effects of the minimum wage are identified by the degree to which the minimum wage binds in different labour markets defined by time, region and sector. The minimum wage affects wages in the lower tail of the distribution, but the effects are most pronounced up to the 20th percentile and then decline markedly as the wage approaches the median wage. The minimum wage is of greater importance for women than for men. Interestingly, the importance of the minimum wage for the lower tail of the wage distribution was smaller during the global financial crisis than before or after the crisis.
- JEL-Codes: F14, F43, O57
- Keywords: inflation ex-post uncertainty, monetary policy, country effects, inflation forecasting
-
No. wp2016-5
(Download at EconPapers)
- Svetlana Makarova
- ECB footprints on inflation forecast uncertainty
The main scope of the paper is to evaluate the hypothesis that the monetary
policy of the European Central Bank leads to convergence in bank-induced effects
in inflation forecast uncertainty for euro area countries. Inflation forecast uncertainty
is measured by the root mean squared pseudo ex-post errors of inflation
forecasts net of the ARCH-GARCH effects. A bootstrap-type test is proposed for
testing convergence of growth of the cross-country uncertainty ratio, understood
as the fraction of the estimated policy effects in inflation uncertainty. Results obtained
from monthly data for 16 countries for the period January 1991 to November
2014 and with forecast horizons from 1 to 18 months show strong evidence of
such convergence among the euro area countries to a common leve
- JEL-Codes: F14, F43, O57
- Keywords: inflation ex-post uncertainty, monetary policy, country effects, inflation forecasting
-
No. wp2016-4
(Download at EconPapers)
- Punnoose Jacob and Lenno Uuskula
- Deep habits and exchange rate pass-through
Habit persistence at the level of individual goods varieties can explain incomplete
exchange rate pass-through to international prices. Deep habits give rise to a dynamic
import demand function that leads to import price markup adjustments, independently
of nominal pricing frictions. Augmenting a standard New Keynesian two-country model
with deep habits, we obtain low exchange rate pass-through to import prices even when
local currency prices are relatively flexible. As prices become more rigid, the presence
of deep habits further reduces the pass-through of exchange rate fluctuations. Without
deep habits, the model requires implausibly high degrees of price stickiness to match the
pass-through dynamics triggered by an exchange rate shock in a vector autoregression
- JEL-Codes: F41, E31
- Keywords: Exchange Rate Pass-through, Deep Habits, Sticky Prices, Price Markups, Local Currency Pricing
-
No. wp2016-3
(Download at EconPapers)
- Jaanika Merikull, Urška Čede, Bogdan Chiriacescu, Peter Harasztosi and Tibor Lalinsky
- Export characteristics and output volatility: comparative firm-level evidence for CEE countries
The literature shows that openness to trade improves longterm
growth but also that it may increase exposure to high output
volatility. In this vein, our paper investigates whether exporting
and export diversification at the firm level have an effect on the
output volatility of firms. We use large representative firm-level
databases from Estonia, Hungary, Romania, Slovakia and Slovenia
over the last boom-bust cycle in 2004–2012. The results confirm
that exporting is related to higher volatility at the firm level.
There is also evidence that this effect increased during the Great
Recession due to the large negative shocks in export markets. In
contrast to the literature and empirical findings for large or advanced
countries we do not find a statistically significant and
consistent mitigating effect from export diversification in the
Central and Eastern European countries. In addition, exporting
more products or serving more markets does not necessarily result
in higher stability of firm sales.
- JEL-Codes: F14, F43, O57
- Keywords: export diversification, export share, volatility of sales, business cycle, Central and Eastern Europe, CEE
-
No. wp2016-2
(Download at EconPapers)
- Alessandra Cepparulo, Juan Carlos Cuestas and Maurizio Intartaglia
- Financial development, institutions and poverty alleviation: an empirical analysis
The aim of this paper is to analyse empirically whether the
level of institutional quality influences how financial development
affects poverty for a sample of developing countries covering
the period from 1984 to 2012. Using an interaction term
constructed as a product between financial development and institutional
quality we find that the pro-poor impact of financial
development decreases as the quality of institutions rises. Such a
differential effect can be ascribed to the capacity of banks to provide
functions that mimic those performed by an institutional
framework that works well. The results of this paper can be used
for policy management
- JEL-Codes: G20, I32, O17
- Keywords: financial development, institutional quality, poverty alleviation, developing countries
-
No. wp2016-11
(Download at EconPapers)
- Georgios Bampinas and Theodore Panagiotidis
- Oil and stock markets before and after financial crises : a local Gaussian correlation approach
The effect of financial shocks on the cross-market linkages between oil prices, both spot and
future, and stock markets is examined for four crises: the Mexican crisis of 1994, the Asian
crisis of 1997, the dot.com bubble of 2000 and the global financial crisis of 2007–09. By
employing the local Gaussian correlation approach introduced in Tjøstheim and Hufthammer
(2013), which captures asymmetries and the intrinsic nonlinearity of the relationship,
we find that the two markets were regionalised for most of the 1990s and the early 2000s.
Flight from stocks to oil occur in all crisis episodes under extreme market conditions, except
the recent global financial crisis. During the latter, evidence of higher correlation
between the two markets throughout the spectrum emerges and this is more pronounced in
the state of financial distress (in the left tail). The view that stock and oil markets behave
like ’a market of one’ after the financialisation of commodities is further supported by the
presence of contagion between US stock markets and all the benchmark crude oil markets.
Finally, our empirical results provide evidence of nonlinear and asymmetric dependence
between oil and stock markets during all financial crisis periods
- JEL-Codes: G01, G10, F3
- Keywords: stocks, crude oil, nonlinear dependence, financial crisis, contagion, local Gaussian correlation
-
No. wp2016-10
(Download at EconPapers)
- Karsten Staehr
- Capital flows and growth dynamics in Central and Eastern Europe
This paper assesses the importance of capital flows as measured by the current account balance for the growth dynamics of the EU countries from Central and Eastern Europe. Economic growth in these countries was on average relatively high before the global financial crisis but markedly lower after the crisis. Panel data econometrics using annual data for 1997–2015 points to the contemporaneous current account balance having a sizeable negative effect on annual GDP growth. Estimations using many control variables and instrumental variables suggest that the negative effect is mainly demand driven. Counterfactual simulations show that growth rates in all CEE countries would have been lower in the absence of capital flows, and this applies particularly to the countries with the most disadvantageous starting points
- JEL-Codes: P17, P21, P36
- Keywords: business cycles, output performance, capital flows, current account balance, transition economies
-
No. wp2016-10
(Download at EconPapers)
- Karsten Staehr
- Capital flows and growth dynamics in Central and Eastern Europe
This paper assesses the importance of capital flows as measured
by the current account balance for the growth dynamics of
the EU countries from Central and Eastern Europe. Economic
growth in these countries was on average relatively high before
the global financial crisis but markedly lower after the crisis.
Panel data econometrics using annual data for 1997–2015 points
to the contemporaneous current account balance having a sizeable
negative effect on annual GDP growth. Estimations using many
control variables and instrumental variables suggest that the negative
effect is mainly demand driven. Counterfactual simulations
show that growth rates in all CEE countries would have been
lower in the absence of capital flows, and this applies particularly
to the countries with the most disadvantageous starting points.
- JEL-Codes: P17, P21, P36
- Keywords: business cycles, output performance, capital flows, current account balance, transition economies
-
No. wp2016-1
(Download at EconPapers)
- Merike Kukk
- Debt repayment problems: what are the implications for consumption?
The paper investigates the impact of debt repayment problems
on consumption using quarterly panel data from 20042011 from
Estonia, a euro area country. The results imply that arrears on
debt lead to substantial short-term changes in consumption. Quarterly
consumption is on average 30 per cent lower in the quarter
when an individual faces debt repayment problems. The longer
the problems last, the more severe the decline in consumption is.
Although consumption recovers after the debt repayment problems
are resolved, the increase is smaller than the original decline
and consumption remains at a lower level than before the arrears
emerged. The results suggest that the experience of debt repayment
problems has severe consequences for consumption in the
short term as well as in the longer term
- JEL-Codes: E21, D14, E32, G21
- Keywords: consumption volatility, indebtedness, debt repayment problems, duration of arrears
-
No. wp2015-8
(Download at EconPapers)
- Dmitry Kulikov and Aleksei Netsunajev
- Identifying Shocks in Structural VAR models via heteroskedasticity: a Bayesian approach
This paper contributes to the literature on statistical identification of
macroeconomic shocks by proposing a Bayesian VAR with time varying
volatility of the residuals that depends on a hidden Markov process, referred
to as an MS-SVAR. With sufficient statistical information in the
data and certain identifying conditions on the variance�covariance structure
of the innovations, distinct volatility regimes of the reduced form
residuals allow all structural SVAR matrices and impulse response functions
to be estimated without the need for conventional a priori identifying
restrictions. We give mathematical identification conditions and propose
a novel combination of the Gibbs sampler and a Bayesian clustering algorithm
for the posterior inference on MS-SVAR parameters. The new
methodology is applied to US macroeconomic data on output, inflation,
real money and policy rates, where the effects of two real and two nominal
shocks are clearly identified
- JEL-Codes: C11, C32, C54
- Keywords: Markov switching models, Volatility regimes, Statistical identification, Bayesian inference, Clustering methods, SVAR analysis
-
No. wp2015-7
(Download at EconPapers)
- Manuel Buchholz
- How effective is macroprudential policy during financial downturns? Evidence from caps on banks̕ leverage
This paper investigates the effect of a macroprudential policy
instrument, caps on banks leverage, on domestic credit to the
private sector since the Global Financial Crisis. Applying a difference-in-differences
approach to a panel of 69 advanced and
emerging economies over 20022014, we show that real credit
grew after the crisis at considerably higher rates in countries
which had implemented the leverage cap prior to the crisis. This
stabilising effect is more pronounced for countries in which
banks had a higher pre-crisis capital ratio, which suggests that after
the crisis, banks were able to draw on buffers built up prior to
the crisis due to the regulation. The results are robust to different
choices of subsamples as well as to competing explanations such
as standard adjustment to the pre-crisis credit boom
- JEL-Codes: E51, E58, G21, G28
- Keywords: macroprudential policies, domestic credit, financial crisis
-
No. wp2015-5
(Download at EconPapers)
- Merike Kukk and Karsten Staehr
- Macroeconomic factors in corporate and household saving. Evidence from Central and Eastern Europe
This paper uses panel data estimations on annual data from 10
Central and Eastern European countries to assess the effect of different
macroeconomic variables on the dynamics of corporate and
household saving. The analyses reveal that changes in the macroeconomic
environment are important for the saving rates in both
sectors, but with marked differences across the sectors. The differences
are most pronounced for the output gap, the real interest
rate, the inflation rate and the current account balance. Some variables
such as the unemployment rate and changes in the real exchange
rate are unimportant in both sectors. The differences
across the sectors underscore the importance of analysing corporate
and household saving separately
- JEL-Codes: E21, E32, E44
- Keywords: sectoral saving rates, Central and Eastern Europe, macroeconomic variables
-
No. wp2015-4
(Download at EconPapers)
- Juan Carlos Cuestas, Karsten Staehr and Fabio Filipozzi
- Uncovered interest parity in Central and Eastern Europe : expectations and structural breaks
This paper examines the empirical validity of the hypothesis of
uncovered interest parity (UIP) using data from five Central and
Eastern European countries with floating exchange rates for the
period 20032014. The analysis includes forward-looking as well
as static expectations and also allows for different types of structural
breaks. The variable representing the deviation from UIP is
stationary when expectations are forward-looking, ruling out persistent
divergences from UIP. The deviation from UIP is however
typically not stationary when expectations are static, even when
structural breaks are incorporated, and this leads to the rejection
of the UIP hypothesis in this case. The results underscore the
importance of the expectations assumptions when the UIP hypothesis
is tested
- JEL-Codes: C32, F15
- Keywords: uncovered interest parity, carry trade, expectations, structural breaks, Central and Eastern Europe
-
No. wp2015-3
(Download at EconPapers)
- Kadri Männasoo and Jaanika Merikull
- The impact of firm financing constraints on R&D over the business cycle
This paper studies financing constraints on R&D over the most
recent boom and bust episode in Central and Eastern Europe
(CEE). Given that financial and venture capital markets in CEE
are thin in comparison to those in high-income economies and
that many of CEE countries experienced a credit crunch during
the last recession, it is proposed that financing constraints have a
significant adverse effect on R&D activity in these countries. The
paper uses two complementary firm-level data-sources from ten
CEE countries. We find that financing constraints have a substantial
effect on R&D expenditures, as the probability of credit
constrained firms undertaking R&D activities is around 70%
lower than for other firms and firms� R&D expenditure sensitivity
to cash flow is very high. Despite the severity of the crisis, the
adverse effect of financing constraints for R&D did not increase
during the financial crisis. We also find that, conditional on credit
constraints, firms� R&D activity is higher during a recession
- JEL-Codes: O16, O32, O52, E32, P23
- Keywords: R&D financing constraints, credit constraints, business cycle, Central and Eastern Europe
-
No. wp2015-2
(Download at EconPapers)
- Andres Kuusk, Karsten Staehr and Uku Varblane
- Sectoral change and labour productivity growth during boom, bust and recovery
This paper assesses the extent of structural or sectoral change
and its importance for aggregate productivity growth during times
of boom, bust and recovery. The analysis covers 10 EU countries
from Central and Eastern Europe over the years 20012012. The
reallocation of labour across sectors was substantial during the
boom, very extensive in 2009 at the depth of the crisis and modest
in the subsequent recovery period. The contribution of sectoral
change to aggregate productivity growth is computed using
various decomposition methods. Changes in labour productivity
within sectors play the dominant role for aggregate productivity
growth, while reallocation of labour between sectors is less important.
This pattern is found through most of the sample period
despite large differences in the extent of sectoral change during
the boom, crisis and recovery
- JEL-Codes: L16, E32, P23
- Keywords: labour productivity, structural change, reallocation, productivity decomposition
-
No. wp2015-01
(Download at EconPapers)
- Lenno Uuskula
- Firm turnover and inflation
dynamics
This paper examines the role of firm turnover in explaining inflation
dynamics. I augment a New-Keynesian DSGE model with endogenous
entry and exogenous stochastic exit and estimate with the Bayesian full
information approach for the US economy. Results show that shocks to
the entry cost explain more than half of the inflation variance at the business
cycle frequencies. When it is cheap to create firms, the number of
new firms goes up and inflation increases as labour intensive creation of
firms pushes up the demand for labour. Only gradually, when the number
of firms is high and the number of new firms goes down again, does
inflation fall, as stressed by the standard mechanism for an increasing
number of firms
- JEL-Codes: E32, C11, E23
- Keywords: inflation, New-Keynesian Phillips curve, firm turnover
-
No. wp2014-9
(Download at EconPapers)
- Jaanika Merikull and Pille Mõtsmees
- Do you get what you ask? The gender gap in desired and realised wages
This paper will study the gender wage gap in desired wages,
realised wages and reservation wages. The notion of desired
wages shows workers� first bet to potential employers during the
job-search process. Two datasets are employed, the electronic
job-search portal database, where individuals signal their desired
wages, and the labour force survey, where realised wages and
reservation wages are reported. The Oaxaca-Ransom decomposition
is implemented to investigate the contribution of characteristics
and coefficients to the gender gap. It is found that: (1) The
unexplained gender wage gap is 22�25% in desired and realised
wages. (2) The unexplained gender wage gap is much larger in
desired wages than in reservation wages for unemployed individuals
showing women�s higher disutility from unemployment.
(3) Women�s lower desired wages are revised up rather than
men�s higher desired wages being revised down on the job. The
results suggest that women are more risk averse in wage bargaining
and self-select into occupations and industries with stable
employment
- JEL-Codes: J16, J13, D13, J31
- Keywords: gender wage gap; reservation wage; family, marriage and work; labour market mobility
-
No. wp2014-8
(Download at EconPapers)
- Liina Malk
- Determinants of reservation wages: empirical evidence for Estonia
This paper provides an empirical analysis of the individual and
macroeconomic determinants of reservation wages with a particular
focus on the influence of unemployment duration. Data from
the Estonian Labour Force Survey 20112013 and instrumental
variable regression analysis are used for estimating the determinants
of reservation wages. The findings indicate that personal
characteristics, the households income level and the regional unemployment
rate are important factors that affect reservation
wage setting. In addition, it appears that unemployment duration
has a significant negative influence on the reservation wage,
which is mainly driven by men and older individuals
- JEL-Codes: J31, J64
- Keywords: unemployment, reservation wage, unemployment duration, instrumental variable regression
-
No. wp2014-7
(Download at EconPapers)
- Jaanika Merikull and Tairi Room
- One currency, one price? Euro Changeover related inflation in Estonia
This paper studies euro changeover-related inflation using disaggregated price level data. The difference-in-differences approach is used and the control group for the treatment country, Estonia, is built from 12 euro area countries. The Nielsen Company disaggregated price data are employed at product, brand and shop-type level. The results indicate that while the overall inflationary effect of euro adoption was modest, the effects were significantly different across various market segments. Changeoverrelated inflation was higher for products that were relatively cheaper than the euro area average. Inflationary effects were stronger in smaller shops.
- JEL-Codes: D49, P46, E58
- Keywords: euro, currency changeover, market concentration, consumer behaviour
-
No. wp2014-6
(Download at EconPapers)
- Tairi Room and Katri Urke
- The Euro Changeover in Estonia: implications for inflation
Estonia changed over from the kroon to the euro in January 2011. This paper analyses the inflationary effect of this event. The analysis is based on the Harmonised Indices of Consumer Prices. The difference-in-differences method is employed where the treated group is Estonia and the control group consists of the other EU member states. The estimation results imply that the inflationary impact of the euro changeover was either insignificant or small in magnitude, depending on which treatment period is considered. The acceleration in inflation mostly occurred in the second half of 2010, during the six-month period prior to the adoption of the euro. Although the actual effect of the euro changeover on inflation was modest, most Estonian citizens felt that the introduction of the new currency increased consumer prices considerably.
- JEL-Codes: D49, P46, E58
- Keywords: euro, currency changeover, consumer prices, inflation
-
No. wp2014-5
(Download at EconPapers)
- Fabio Filipozzi and Kersti Harkmann
- Currency hedge walking on the edge?
We study whether it is possible to find optimal hedge ratios for a foreign currency bond portfolio to lower significantly the risk and increase the risk adjusted return of a portfolio. The analysis is conducted from the perspective of euro area based investors to whom short-selling restrictions might apply. The ordinary least squares approach is challenged with the optimal hedge ratios found by the DCC-GARCH approach in order to investigate whether time-varying hedging is superior to the standard constant hedge ratios found by OLS. We find that hedging significantly lowers the portfolio risk in domestic currency terms and improves the Sharpe ratios for both single instrument and equally weighted multi asset portfolios. Optimal hedging using the standard OLS approach and using time-varying hedging give similar results, the latter being superior to the first in terms of risk-adjusted return.
- JEL-Codes: C32, C58, G11, G15, G23, G32
- Keywords: optimal hedge ratios, portfolio risk hedging
-
No. wp2014-4
(Download at EconPapers)
- Juan Carlos Cuestas and Karsten Staehr
- The great (De)leveraging in the GIIPS countries. Domestic credit and net foreign liabilities 19982013
This paper considers the relationship between domestic credit and foreign capital flows in the GIIPS countries before and after the outbreak of the global financial crisis. Cointegration analyses on the pre-crisis sample reveal that domestic credit and net foreign liabilities are cointegrated for Greece, Italy, Portugal and Spain, but not for Ireland. For the first four countries the long-run coefficient is in all cases around one, suggesting a one-to-one relationship between domestic leveraging and foreign capital inflows. Estimation of VECMs on data from the pre-crisis period shows that the adjustment to deviations from the long-run relationship takes place through changes in domestic credit for Greece and Italy, while the adjustment is bidirectional for Portugal and Spain. These results suggest that push from foreign capital inflows was an important factor in the pre-crisis leveraging. The deleveraging after the crisis was largely unrelated to developments in foreign capital flows
- JEL-Codes: F32, E51, E44, C32
- Keywords: leveraging, capital flows, financial crisis, cointegration
-
No. wp2014-3
(Download at EconPapers)
- Juan Carlos Cuestas, Luis A. Gil-Alana and Paolo Jose Regis
- On the changes in the sustainability of European external debt: what have we learned
In this paper we aim to analyse the level of sustainability of external debt and, more importantly, how it has changed for a number of European economies. Given the severity of the crisis since 2008, we argue that the path of external debt burdens may have changed since the start of the crisis, given the concerns about debt accumulation in most countries. We follow the advice of Bohn (2007) and analyse the reaction of present debt accumulation to past debt stock, incorporating the possibility of endogenously determined structural breaks in this reaction function. We find that structural breaks happen in most cases after 2008, highlighting the importance of the policy measures taken by most governments.
- JEL-Codes: E31, E32, C22
- Keywords: external debt, sustainability, crisis
-
No. wp2014-2
(Download at EconPapers)
- Merike Kukk
- Distinguishing the components of household financial wealth: the impact of liabilities on assets in Euro Area countries
The paper investigates the interdependence of household financial liabilities and assets, with special focus on the impact of liabilities on households holdings of financial assets. The paper uses the new ECB Household Finance and Consumption Survey from 20092010 covering euro area countries. The paper estimates a system of equations for households financial liabilities and assets, taking account of endogeneity and selection bias. The results indicate that higher household liabilities are related to lower holdings of financial assets. The findings are consistent with the hypothesis that wider use of credit leads to lower savings. The paper highlights that the distinction between the components of households wealth provides additional insights into households financial behaviour
- JEL-Codes: D14, E21, D12
- Keywords: household debt, household wealth, financial assets, liabilities, financial vulnerability
-
No. wp2014-10
(Download at EconPapers)
- Dmitry Kulikov
- Law of One Price in the euro area: an empirical investigation using Nielsen disaggregated price data
This paper examines the Law of One Price using Nielsen disaggregated
price data covering 13 euro area countries and 45 different product
categories over the time period 2008 to 2012. The empirical methodology
is based on a non-structural log-linear regression with spatial effects
in both the geographical and product-variety dimensions, estimated by
the Bayesian methods. The models link the relative prices of homogenous
products in the sample of euro area countries to four distinct groups
of factors: product-specific consumption preferences, country-specific
macroeconomic and regional characteristics, volatility of prices and volumes,
and spatial effects. The estimated reduced-form Law of One Price
models uncover a strong interdependence of relative prices both on the
geographical scale and across similar product varieties, going beyond
the included set of explanatory variables and warranting further empirical
investigation.
- JEL-Codes: C21, D40, E31
- Keywords: disaggregated prices, spatial dependence, Bayesian estimation, Law of One Price
-
No. wp2014-1
(Download at EconPapers)
- Jaanika Merikull and Tairi Room
- Are foreign-owned firms different ? Comparision of employment volatility and elasticity of labour demand
This paper analyses differences in employment volatility in
foreign-owned and domestic companies using firm-level data
from 24 European countries. The presence of foreign-owned
companies may lead to higher employment volatility because
subsidiaries of multinational companies react more sensitively to
changes in labour demand in host countries or because they are
more exposed to external shocks. We assess the conditional employment
volatility of firms with foreign and domestic owners using
propensity score matching and find that it is higher in foreignowned
firms in about half of the countries that our study covers.
In addition, we explore how and why labour demand elasticity
differs between these two groups of companies. Our estimations
indicate that labour demand can be either more or less elastic in
subsidiaries of foreign-owned multinationals than in domestic enterprises,
depending on the institutional environments of their
home and host countries. When FDI originates from a region with
a more flexible institutional environment then the elasticity of labour
demand is smaller in absolute value in foreign-owned firms.
In the opposite case the elasticity of labour demand is higher. A
potential explanation for this empirical finding is that it is easier
for multinational companies to substitute between factor inputs
and therefore they have more flexibility than domestic firms in
choosing which channels of adjustment to use.
- JEL-Codes: F23, J23, J51
- Keywords: foreign direct investment (FDI), employment volatility, labour demand, labour market institutions, European Union
-
No. wp2013-9
(Download at EconPapers)
- Dmitry Kulikov and Aleksei Netsunajev
- Identifying monetary policy
shocks via heteroskedasticity:
a Bayesian approach
In this paper we contribute to the literature on the identification
of macroeconomic shocks by proposing a Bayesian SVAR with timevarying
volatility of innovations that depend on a hidden Markov process,
referred to as an MS-SVAR. With sufficient statistical information
in the data, the distinct volatility regimes of the errors allow all the
structural SVAR matrices and impulse response functions to be identified
without the need for conventional a priori parameter restrictions.
We give mathematical identification conditions and propose a flexible
Gibbs sampling approach for the posterior inference on MS-SVAR parameters.
The new methodology is applied to the US, euro area and
Estonian macroeconomic series, where the effects of monetary policy
and other shocks are examined
- JEL-Codes: C11, C32, C54
- Keywords: Markov switching model, volatility regimes, Bayesian inference, monetary policy shocks, SVAR analysis
-
No. wp2013-9
(Download at EconPapers)
- Dmitry Kulikov and Aleksei Netsunajev
- Identifying monetary policy
shocks via heteroskedasticity:
a Bayesian approach
In this paper we contribute to the literature on the identification
of macroeconomic shocks by proposing a Bayesian SVAR with timevarying
volatility of innovations that depend on a hidden Markov process,
referred to as an MS-SVAR. With sufficient statistical information
in the data, the distinct volatility regimes of the errors allow all the
structural SVAR matrices and impulse response functions to be identified
without the need for conventional a priori parameter restrictions.
We give mathematical identification conditions and propose a flexible
Gibbs sampling approach for the posterior inference on MS-SVAR parameters.
The new methodology is applied to the US, euro area and
Estonian macroeconomic series, where the effects of monetary policy
and other shocks are examined.
- JEL-Codes: C11, C32, C54
- Keywords: Markov switching model, volatility regimes, Bayesian inference, monetary policy shocks, SVAR analysis
-
No. wp2013-8
(Download at EconPapers)
- Boris Blagov
- Financial crises and time-
varying risk premia in a small
open economy: a Markov-Switching DSGE model for
Estonia
Under a currency board the central bank relinquishes control over its
monetary policy and domestic interest rates converge toward the foreign
rates. Nevertheless a spread between both usually remains. This spread
can be persistently positive due to increased risk in the economy. This
paper models that feature by building a DSGE model with a currency
board, where the domestic interest rate is derived as a function of the
foreign rate, the external debt position and an exogenous risk premium
component. Applying Markov-Switching allows for time variation in
the volatility of the risk premium component. The model shows that the
size of risk premia shocks in an economy with a currency board is small
in quiet times but the shocks are much larger during crises, which the
standard model would understate. The model is applied with Bayesian
methods to Estonian data and is able to match the banking and financial
crises
- JEL-Codes: E32, F41, C51, C52
- Keywords: Markov-Switching DSGE Models, currency board, stochastic risk premium
-
No. wp2013-7
(Download at EconPapers)
- Gertrud Errit and Lenno Uuskula
- Euro Area monetary policy
transmission in Estonia
This paper studies the effect of a monetary policy shock in the euro
area on the main Estonian economic and financial variables between
2000 and 2012. Using a standard structural vector autoregression (SVAR)
model we find strong and persistent effects on Estonian GDP, private
consumption, corporate investment and imports. A monetary policy
shock has also strong and sluggish effects on the housing loan and consumer
credit interest rates. The estimated reaction of Estonian GDP and
the GDP deflator-based inflation rate is about four times stronger than
the reaction of euro area-wide aggregates. The Estonian money market
interest rate (the 3-month Talibor) reacts about twice as strongly as the
euro area money market interest rate (the 3-month Euribor). We also
show that this finding is sensitive to the inclusion of the data from the
years of the recent financial and economic crisis. We conjecture that
household interest rates can play an important role in propagating monetary
policy shocks in Estonia.
- JEL-Codes: E32, E52, C32
- Keywords: monetary policy, SVAR, Estonia, euro area
-
No. wp2013-6
(Download at EconPapers)
- Merike Kukk and Karsten Staehr
- Income underreporting by households with business income. Evidence from Estonia.
This paper estimates the extent of income underreporting by households
with business income relative to households of wage earners in
Estonia. The paper uses a modified version of the methodology pioneered
by Pissarides and Weber (1989). The extent of income underreporting
is estimated by comparing food Engel curves for households
with and without business income. The baseline result is that the reported
income of households with business income above 20% of total
income must be multiplied by 2.6 in order to attain the same propensity
of food consumption as households of wage earners. Households with
business income above 0 but below 20% also underreport income, but
to a lesser extent. The estimates are higher than those found for developed
countries, but consistent with other studies of the shadow economy
in transition countries. The analysis also shows that the presence
of business income is a better indicator of income underreporting than a
reported status of self-employment.
- JEL-Codes: H26, E21, E26, H24
- Keywords: tax evasion, business income, income underreporting, Engel curve, transition country
-
No. wp2013-5
(Download at EconPapers)
- Guido Baldi and Karsten Staehr
- The European debt crisis
and fiscal reaction functions
in Europe 20002012
After the global financial crisis, some governments in the EU
experienced serious debt financing problems, while others were less
affected. This paper seeks to shed light on the divergent fiscal
performance by assessing the fiscal conduct in the EU countries before
and after the outbreak of the crisis. Fiscal reaction functions of the
primary balance are estimated for different groups of EU countries
using quarterly data for the pre-crisis period 20012008 and for the
post-crisis period 20092012. The pre-crisis estimations reveal some
differences in persistence and cyclical reaction between different
groups of countries, but generally little feedback from the debt stock to
the primary balance. The countries that eventually developed fiscal
problems do not stand out. The post-crisis estimations show less
counter-cyclicality and much more feedback from the debt stock, and
these reactions are particularly pronounced for the countries with severe
fiscal problems
- JEL-Codes: E61, E62, H62, H63
- Keywords: fiscal reaction function, global financial crisis, debt crisis, structural break
-
No. wp2013-4
(Download at EconPapers)
- Liina Malk
- Relaxation of employment
protection and its effects on
labour reallocation
Flexibility of employment protection is considered to be essential
for rapid adjustments in the workforce to changing economic conditions
and for the reallocation of labour towards more productive activities.
This was one of the main arguments for the new Employment Contracts
Act in Estonia, which eased employment protection by reducing the
costs of terminating employment relationships. Since such substantial
changes in employment protection legislation (EPL) are quite rare, this
reform provides a good chance to examine the outcomes of the relaxation
of employment protection. This paper evaluates the effects of this
institutional change on labour reallocation. Exploiting the microdata of
the Labour Force Surveys for the years 20072011, we analyse worker
flows and employ the difference in differences approach to identify the
effects of the EPL reform, using Lithuanians as a control group for Estonians.
Subsequent to the reform, labour flows out of and into employment
increased in Estonia relative to Lithuania. However, from the
regression analysis, a statistically significant impact of the EPL reform
was identified only on the former of these two types of flows. Both the
assessment of aggregate flows and the estimation of difference in differences
effects for transition probabilities indicate that the reform of
employment protection resulted in lower job-to-job flows while the
overall effect on labour reallocation was positive.
- JEL-Codes: J60, K31
- Keywords: employment protection legislation, labour reallocation, policy evaluation, difference in differences estimation
-
No. wp2013-3
(Download at EconPapers)
- Michael Ehrmann, Chiara Osbat, Jan Strasky and Lenno Uuskula
- The Euro exchange rate during the European sovereign
debt crisis � dancing to its
own tune?
This paper studies the determinants of the euro exchange rate during
the European sovereign debt crisis, allowing a role for macroeconomic
fundamentals, policy actions and the public debate by policy makers. It
finds that the euro exchange rate mainly danced to its own tune, with a
particularly low explanatory power for macroeconomic fundamentals.
Among the few factors that are found to have affected changes in exchanges
rate levels are policy actions at the EU level and by the ECB.
The findings of the paper also suggest that financial markets might have
been less reactive to the public debate by policy makers than previously
feared. Still, there are instances where exchange rate volatility was increasing
in response to news, such as on days when several politicians
from AAA-rated countries went public with negative statements, suggesting
that communication by policy makers at times of crisis should
be cautious about triggering undesirable financial market reactions
- JEL-Codes: E52, E62, F31, F42, G14
- Keywords: exchange rates, fundamentals, announcements, sovereign debt crises
-
No. wp2013-2
(Download at EconPapers)
- Philip Du Caju, Theodora Kosma, Martina Lawless and Tairi Room
- Why firms avoid cutting
wages: survey evidence from
European firms
The rarity with which firms reduce nominal wages has been frequently
observed, even in the face of considerable negative economic
shocks. This paper uses a unique survey of fourteen European countries
to ask firms directly about the incidence of wage cuts and to assess the
relevance of a range of potential reasons for why they avoid cutting
wages. Concerns about the retention of productive staff and a lowering
of morale and effort were reported as key reasons for downward wage
rigidity across all countries and firm types. Restrictions created by collective
bargaining were found to be an important consideration for
firms in euro area countries but were one of the lowest ranked obstacles
in non-euro area countries. The paper examines how firm characteristics
and collective bargaining institutions affect the relevance of each of
the common explanations put forward for the infrequency of wage cut
- JEL-Codes: J30, J32, J33, J51, C81, P5
- Keywords: labour costs, wage rigidity, firm survey, wage cuts, European Union
-
No. wp2013-1
(Download at EconPapers)
- Ardo Hansson and Martti Randveer
- Economic adjustment in the Baltic Countries
Estonia, Latvia and Lithuania stand out for their rapid economic adjustment after the outbreak of the global financial crisis. The reduction of imbalances and vulnerabilities in the Baltic countries has been much faster than that in the euro area countries most affected by the debt crisis. Our analysis seeks to explain these developments by addressing the following questions. First, what explains the recent cyclical pattern of the Baltic economies? Second, what are the similarities and differences between the economic adjustment in the Baltics and that in the euro area countries most affected by the recent debt crisis? And, finally, how successful has the strategy of adjustment been in the Baltic countries? We argue that the primary driving force of the cyclical developments in the Baltic economies has been the change in capital flows. A comparison of the economic adjustment in the Baltic countries with that in the three euro area countries strongly affected by the debt crisis Ireland, Greece and Portugal suggests that the main determinant of the speed of adjustment has been the ability of the countries to mitigate the impact of the sudden stop in private sector capital flows. Looking at the pros and cons of rapid and gradual adjustment, we conclude that in the case of the Baltic countries, the strategy of rapid adjustment has overall been a successful response to a very difficult situation
- JEL-Codes: E32, G01, P52
- Keywords: business cycles, economic adjustment, financial crisis, Baltic economies
-
No. wp2012-8
(Download at EconPapers)
- Jaanika Merikull, Tairi Room and Karsten Staehr
- Perceptions of unreported
economic activities in Baltic
Firms. Individualistic and
non-individualistic motives
This paper analyses managerial dishonesty in the form of economic
activity not reported to the authorities. We employ data from a survey
of Baltic firm managers, who were asked to assess the prevalence of
unreported profits, employment and wages in their industry and to give
their views on a range of questions related to various reasons for dishonest behaviour. Unreported economic activities are perceived to be
widespread, although their extent and composition vary across the three
countries. We employ a principal component analysis of the survey answers and identify three clusters capturing both individualistic and nonindividualistic motives for dishonest behaviour: 1) reciprocity towards
government; 2) rational choice related motives; and 3) norms towards
society as proxied by the tolerance of illegal activities. The econometric
analysis indicates that all three motives are related to perceptions of unreported activities in the Baltic countries
- JEL-Codes: E61, F36, F41
- Keywords: unreported economic activity, tax evasion, tax morale, norms, governance, social coherence, Baltic countries
-
No. wp2012-7
(Download at EconPapers)
- Aurelijus Dabuinskas, Dmitry Kulikov and Martti Randveer
- The impact of volatility on economic growth
This paper investigates the impact of macroeconomic volatility on
growth in a panel of 121 countries over the period 1980 to 2010. We
confirm the Ramey and Ramey (1995) result that macroeconomic
volatility is negatively related to economic growth using a different
empirical methodology and a newer dataset. Among the issues that
await further work are the interaction of financial development and
volatility, potential non-linearities of the impact of macroeconomic
volatility on growth, and issues related to the endogeneity of growth
and volatility in the context of empirical growth regression models
- JEL-Codes: E40, O40, C33
- Keywords: economic growth, macroeconomic volatility, growth regressions, panel data
-
No. wp2012-6
(Download at EconPapers)
- Aleksei Netsunajev
- Reaction to technology shocks in Markov-switching structural VARs: identification via heteroskedasticity
The paper reconsiders the conflicting results in the debate connected to the effects of technology shocks on hours worked. Given the major dissatisfaction with the just-identifying long-run restrictions, I analyze whether the restrictions used in the literature are consistent with the data. Modeling volatility of shocks using Markov switching structure allows to obtain additional identifying information and perform tests of the restrictions that were just-identifying in classical structural vector autoregressive analysis. Using six ways of identifying technology shocks, I find that not all of them are supported by the data. There is no clear-cut evidence in favor of a positive reaction of hours to technology shocks
- JEL-Codes: C32
- Keywords: technology shocks, Markov switching model, heteroskedasticity
-
No. wp2012-5
(Download at EconPapers)
- Hubert Gabrisch and Karsten Staehr
- The Euro Plus Pact: Competitiveness and external capital flows in the EU countries
- JEL-Codes: E61, F36, F41
- Keywords: European integration , policy coordination , unit labor costs , current account imbalances, economic crises
-
No. wp2012-4
(Download at EconPapers)
- David Seim
- Job displacement and labor market outcomes by skill level
This paper investigates the effects of displacement on outcomes such as annual earnings, unemployment, wages and hours worked. It relies on previously unexplored administrative data on all displaced workers in Sweden in 2002, 2003 and 2004 which are linked to employer-employee matched data at the individual level. By linking the data to military enlistment records, the paper assesses the selection into displacement and finds that workers with low cognitive and noncognitive skills are significantly more likely to be displaced than high-skilled workers. The analysis of displacement effects shows evidence of large and long-lasting welfare costs from displacement. Moreover, studying the heterogenous impacts of job displacement in terms of cognitive and noncognitive skills reveals that although workers with high skills fare better than low-skilled workers in absolute terms, there are no significant differences in the recovery rates between skill groups. Finally, by using administrative data on displacements, it is possible to assess quantitatively the bias that results from not being able to separate quits from layoffs in earlier studies
- JEL-Codes: J60, J63, J65, I21, C23
- Keywords: job displacement, cognitive and noncognitive skills, employer-employee data
-
No. wp2012-3
(Download at EconPapers)
- Merike Kukk, Dmitry Kulikov and Karsten Staehr
- Consumption sensitivities in
Estonia: income shocks of different persistence
The Permanent Income Hypothesis (PIH) entails that consumption reacts more strongly to persistent than to temporary income shocks. This prediction is tested using data from the Estonian Household Budget Surveys for 2002-2007. The dataset contains questions which make it possible to distinguish between persistent and temporary income shocks based on the households' own assessment. The estimations confirm that the marginal propensities to consume out of the two income shocks differ, households are forward-looking and seek to smooth consumption. Moreover, the estimated propensities of persistent shocks are of reasonable magnitudes, consistent with the PIH. Further analysis reveals, however, features that are in breach of the PIH. The consumption estimations are affected by lagged temporary income shocks. When income shocks are decomposed into positive and negative values, there is evidence of excess sensitivity to positive temporary shocks.
- JEL-Codes: D12, E21, R22
- Keywords: consumption, Permanent Income Hypothesis, income persistence, consumption smoothing, rule-of-thumb consumption
-
No. wp2012-2
(Download at EconPapers)
- Jaanika Merikull
- Households borrowing during a
creditless recovery
This paper investigates the contribution of households to the creditless recovery. We use Estonian cross-sectional microdata on households' assets, liabilities, income, expectations and intention to use credit in 2001-2010. The results indicate that (1) there was a large-scale drop in households demand for credit during the recession and sluggish recovery after the recession. (2) One third of the sluggish recovery in credit demand is explained by changed household endowments such as income reduction and lower income expectations, while two thirds is explained by changed behavioural relations such as renters taking mortgages less often and employed individuals using credit less often. (3) Changed behavioural relations explain a higher proportion of the credit demand drop in longer-term credit such as loans than in shorter-term credit such as credit card purchases. (4) 44% of households who wanted to use credit were credit constrained during the recovery and households with lower credit worthiness were more likely to apply for credit.
- JEL-Codes: D12, D14, G01
- Keywords: households borrowing, business cycles, micro-econometric evidence, Oaxaca-Blinder decomposition
-
No. wp2012-1
(Download at EconPapers)
- Kadri Mnnasoo
- Determinants of bank interest
spread in Estonia
The recent global financial turmoil increased bank interest spreads in Estonia to the highest levels recorded since the Russian crisis in 1998- 1999. The pure spread concept and the two-step estimation approach of Ho and Saunders (1981) have been used to decompose the interest spreads in Estonia. The pure spread is mainly determined by risk aversion and the market structure of the banking sector, with money market interest volatility playing quite a modest role in the long-term equilibrium. The regulatory, efficiency and bank-portfolio effects share a roughly equal weight in the observed spread, whereas credit risk adds only a tiny portion to the mark-up. Strong liquidity and foreign capital permit lower spreads
- JEL-Codes: G21, E43
- Keywords: bank interest spread, dealership model
-
No. wp2011-10
(Download at EconPapers)
- Martti Randveer, Lenno Uuskula and Liina Kulu
- The impact of private debt on economic growth
Both theoretical and empirical evidence show that recessions are steeper in countries with high levels of private debt and/or credit booms. But do these negative effects carry over to the period where the recession is over and the economy recovers from the crisis? In this paper we look at economic recovery episodes and relate the growth performance of countries with their debt levels and debt growth before the beginning of the recession. We find that a higher level of debt before a recession is correlated with smaller economic growth after the economic slowdown has finished. In contrast, higher credit growth before a recession is associated with higher GDP growth after the crisis. The effects of debt on consumption are more negative, implying that after recessions people consume less and save more than they did in the period before the recession. However, the overall economic effects of the debt measures on GDP and consumption growth are limited
- JEL-Codes: E32, O16, E44
- Keywords: private debt, recession, economic growth, consumption
-
No. wp2011-09
(Download at EconPapers)
- Kadri M�nnasoo and Jaanika Merikull
- How do demand fluctations and credit constraints affect R&D? Evidence from Central, Southern and Eastern Europe.
The opportunity cost approach suggesting a countervailing cyclical effect between R&D and short-term investments is the subject of theoretical and empirical debate. We extend the discussion by investigating the impact of demand fluctuations and credit constraints on firms' R&D in ten new EU member states from Central, Southern and Eastern Europe (CSEE). Using membership of the OECD as a proxy for the country's level of development we find more counter-cyclicality amongst the firms in non-OECD CSEE countries, while a similar but somewhat less accentuated counter-cyclical pattern of R&D behaviour emerges in the more advanced OECD-CSEE countries. Surprisingly, any adverse effect from credit constraints on firm's engagement in R&D is largely absent in CSEE countries
- JEL-Codes: G31, E32, O30, O52
- Keywords: R&D cyclicality, demand shocks, credit constraints, Central and Eastern Europe
-
No. wp2011-08
(Download at EconPapers)
- Juan Carlos Cuestas and Karsten Staehr
- Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe
This paper analyses the time series properties of the fiscal balance in the 10 EU countries from Central and Eastern Europe. The persistence of shocks in the variable is analysed by means of unit root tests that account for the possibility of non-linearities and structural changes. The results of linear and non-linear unit root tests find only mild evidence in favour of the stationarity hypothesis, with asymmetric effects present in a few cases. After controlling for structural changes in the data generation process, the results point to stochastic stationarity of the series. Thus, in spite of relatively steady headline figures, the public balance processes exhibit substantial instability in the EU countries from Central and Eastern Europe
- JEL-Codes: C32, E24
- Keywords: unit roots, structural breaks, budget balance, EU
-
No. wp2011-07
(Download at EconPapers)
- Kadri M�nnasoo and Jaanika Merikull
- R&D in boom and boost : evidence from the World Bank Financial Crisis Survey
The full implications of the global financial crisis of 2008-2009 are yet to be revealed. The crucial question is whether a crisis of such severe magnitude will set "cleansing mechanisms" into motion as suggested by the opportunity cost argument of R&D, or rather destroy the long-term productivity enhancing incentives? The World Bank Financial Crisis Survey collects direct self-reported measures of firms' credit frictions and R&D during 2009-2010 from six countries: Bulgaria, Latvia, Lithuania, Hungary, Romania and Turkey. Employing this dataset, we seek evidence of how the firms' R&D responded to the negative demand shock and credit contraction at the time of the crisis. Looking at two distinct episodes, the sustained economic growth in 2001-2007 and the sudden slump in 2009-2010, we observe a paradigm shift in firms' R&D decisions: whilst the R&D is counter-cyclical during the pre-crisis period, a pro-cyclical pattern emerges during the crisis
- JEL-Codes: G31, E32, O30, O52
- Keywords: R&D cyclicality, demand shocks, credit constraints, financial crisis
-
No. wp2011-06
(Download at EconPapers)
- Aurelijus Dabu�inskas and Tairi Room
- Survey evidence on wage and price setting in Estonia
In this paper, we give a comprehensive overview of wage and price adjustment practices in Estonia, drawing from two managerial surveys which were conducted in autumn 2007 and summer 2009 within the framework of the Wage Dynamics Network (WDN), a joint research project by the Eurosystem/ESCB. Our discussion covers a broad range of results, including firm-level descriptive evidence for several institutional and structural characteristics of the Estonian economy such as unionisation and collective bargaining coverage, labour intensity of production, remuneration methods, product market competition, etc., and insights into the wage and price setting behaviour of Estonian firms. To illustrate this behaviour, we give an overview of the frequency and timing of wage and price changes; the extent of downward nominal and real wage rigidity; the determinants of wages paid to newly employed workers; and finally, the nature of firms' adjustments to cost push and negative demand shocks
- JEL-Codes: D22, E3, J3
- Keywords: survey data, wage setting, price setting, Estonia
-
No. wp2011-05
(Download at EconPapers)
- Kadri M�nnasoo and Jaanika Merikull
- R&D, demand fluctuations and credit constraints: comparative evidence from Europe.
This paper contributes to the literature by investigating whether the cyclicality of R&D differs across countries with different levels of development. The paper uses micro-data from the World Bank/EBRD Business Environment and Enterprise Performance survey from 2001- 2007 and estimates bivariate probit model of firms' R&D conditioned on credit constraints. The main results are: (1) The likelihood of a firm conducting R&D increases with sales growth and decreases with credit constraints. (2) R&D by firms is counter-cyclical to exogenous industry output and a negative industry demand shock has a stronger countercyclical effect on R&D than a positive industry demand shock does. (3) R&D is more counter-cyclical to demand shocks the further the country is from the technological frontier
- JEL-Codes: G31, E32, O30, O52
- Keywords: R&D cyclicality, demand fluctuations, credit constraints, comparative study
-
No. wp2011-04
(Download at EconPapers)
- Tairi Rm and Aurelijus Dabuinskas
- How wages respond to shocks : asymmetry in the speed of adjustment
The time series of various economic variables often exhibit asymmetry: decreases in the values tend to be sharp and fast, whereas increases usually occur slowly and gradually. We detect signs of an analogous asymmetry in firms' wage setting behaviour on the basis of managerial surveys, with employers tending to react faster to negative than to positive shocks in the same variables. As well as describing the presence of asymmetry in the speed of wage adjustment, we investigate which companies are more likely to demonstrate it in their behaviour. For this purpose, we apply the Heckman selection model and develop a methodology that improves identification by exploiting heteroscedasticity in the selection equation. The estimation results imply that companies operating in a more competitive environment have a higher propensity to react asymmetrically. We also find that businesses relying on labour-intensive production technology are more likely to react faster to negative shocks. Both of these findings support the hypothesis that this behaviour results from companies' attempts to protect profit margins.
- JEL-Codes: J30, J31, J33
- Keywords: wage dynamics, asymmetry, wage setting, survey
-
No. wp2011-03
(Download at EconPapers)
- Karin Kondor and Karsten Staehr
- The impact of the global financial crisis on output performance across the European Union: vulnerability and resilience.
This paper uses regression analyses to explain the different output performance in the 27 countries in the EU based on measures of their pre-existing vulnerability and resilience. Rapid financial deepening and high financial leverage, both domestically and externally, were followed by larger output losses during the crisis. The level of financial depth, on the other hand, did not affect output negatively. A large degree of trade openness was associated with weaker output performance, possibly because of falling export demand during the crisis. Finally, government deficits and debt stocks do not seem have impacted negatively on output. The Baltic States stand out as having much explanatory power in the sample due to their large output losses during the crisis.
- JEL-Codes: E32, F4, G01, H12
- Keywords: global financial crisis, contagion, business cycles, GDP
-
No. wp2011-02
(Download at EconPapers)
- Jaan Masso, Jaanika Merikull and Priit Vahter
- Gross profit taxation versus distributed profit taxation and firm perfomance : effects of Estonia,s corporate income tax reform
This paper estimates the effect of the corporate tax reform in Estonia in the year 2000. This unique reform nullified the taxation of retained earnings and retained the corporate income tax only on distributed profits. The effect of the reform is identified by comparing the performance of Estonian firms that were affected with that of firms from Latvia and Lithuania, the two other Baltic states. We use firm-level financial data and the difference in differences and propensity score matching methods for our analysis. The results show that the corporate tax reform has resulted in increased holdings of liquid assets and lower use of debt financing. These developments have contributed positively to firms' survival during the recent global economic crisis. A positive effect on investment and labour productivity has also been found
- JEL-Codes: H25, H32, D22, O16
- Keywords: corporate income tax, capital structure, liquidity, investments, productivity, comparative economic development
-
No. wp2011-01
(Download at EconPapers)
- Jaanika Merikll
- Labour market mobility
during a recession :
the case of Estonia
The paper investigates the dynamics of worker flows and the duration of different labour market states during the recent boom and bust of 2001-2010 in Estonia. We find that labour market adjustment has mostly taken place through massive worker reallocation, resulting in a high unemployment rate. Despite high worker flows from employment to unemployment, labour market mobility has fallen in many ways during the recession: job tenure and unemployment spells have increased, while job-to-job transitions and mobility across industries and occupations have fallen. The unemployed with the lowest level of education and non-Estonians have the lowest mobility to enter employment and run the highest risk of long-term unemployment. There is evidence of softer ways of adjustments to the crisis, where more workers are engaged in remote work, part-time work or jobs that do not match their skills. Internal migration has small potential to alleviate the high unemployment. The current crisis has hit the country more evenly across its regions than the Russian crisis did. Unemployment has increased similarly in all regions and unemployment inequality has dropped. Even so, there are some signs of marginalisation. The situation is worst in the north-eastern part of the country with unemployment hitting 25%
- JEL-Codes: J60, E32, J61, J62, J64
- Keywords: worker reallocation, unemployment and employment duration, business cycle
-
No. wp2010-07
(Download at EconPapers)
- Giuseppe Bertola, Aurelijus Dabuinskas, Marco Hoeberichts, Mario Izquierdo, Claudia Kwapil, Jrmi Montorns and Daniel Radowski
- Price, wage and employment response to shocks : evidence from the WDN survey
This paper analyses information from survey data collected in the framework of the Eurosystem's Wage Dynamics Network (WDN) on patterns of firm-level adjustment to shocks. We document that the relative intensity and the character of price vs. cost and wage vs. employment adjustments in response to cost-push shocks depend - in theoretically sensible ways - on the intensity of competition in firms' product markets, on the importance of collective wage bargaining and on other structural and institutional features of firms and of their environment. Focusing on the pass-through of cost shocks to prices, our results suggest that the pass-through is lower in highly competitive firms. Furthermore, a high degree of employment protection and collective wage agreements tend to make this pass-through stronger
- JEL-Codes: J31, J38, P50
- Keywords: wage bargaining, labour-market institutions, survey data, European Union
-
No. wp2010-06
(Download at EconPapers)
- Karsten Staehr
- Inflation in the New EU Countries from Central and Eastern Europe : Theories and panel data estimations
This paper seeks to identify factors driving consumer price inflation in the new EU member countries from Central and Eastern Europe. Different theories are discussed, including some of particular importance to economies experiencing high economic growth and rapid structural change. The explanatory power of the theories is tested using panel data estimations based on annual data from 1997 to 2007. Convergence- related factors, including the Balassa-Samuelson and the Bhagwati capital-deepening effects, are important drivers of inflation. Import inflation and, by implication, exchange rate developments have an important impact, while the exchange rate regime is unimportant. Higher government debt and larger revenues are associated with higher inflation. The cyclical position as measured by unemployment, employment changes or the current account balance is found to affect inflation. Food price shocks have large but short-lived effects, while energy price shocks have longer-lasting effects on the inflation rate. Multicollinearity across the explanatory variables makes it difficult to identify the effect of each individual factor
- JEL-Codes: E31, E42, E63, P24
- Keywords: inflation, inflation theories, real and nominal convergence, inflation determinants
-
No. wp2010-05
(Download at EconPapers)
- Masso, Jaan, Roolaht, Tnu and Varblane, Urmas
- Foreign direct investment and innovation in Central and eastern Europe : evidence from Estonia
A growing literature is trying to analyse the productivity gap between domestic and foreign firms with differences in innovation indicators. In our paper we analyse the relationship between inward and outward FDI at either company or industry level and the innovation behaviour of companies in Estonia. We use company-level data from three waves of the Community Innovation Surveys, which are combined with financial data from the Estonian Business Register and FDI data from the balance of payments statistics. For the analysis we apply a structural model involving equations on innovation expenditure, innovation outcome and productivity, and also innovation accounting and propensity score matching approaches. Our results show that the higher innovation output of foreign owned companies vanishes after various company characteristics are controlled for, but there were significant differences in innovation inputs such as the higher use of knowledge sourcing and the lower importance of various impeding factors. Outward investment has a positive influence on innovativeness among both domestic and foreign owned companies
- JEL-Codes: F10, F23, O30
- Keywords: innovation, internationalisation, foreign direct investments, catching-up countries
-
No. wp2010-04
(Download at EconPapers)
- Karsten Staehr
- Income convergence and inflation in Central and Eastern Europe : does the sun always rise in the East
This paper investigates the process of price convergence in the 10 new EU countries from Central and Eastern Europe. The analyses are based on panel data from 1995 to 2008 of the common currency price relative to the EU15 average. The lagged income level exhibit little explanatory power towards relative inflation, while the lagged price level has some explanatory power. In the long term the relative income and price levels are closely correlated implying concurrent nominal and real convergence. Deviations from the long-term relation between price and income levels are gradually closed by changes in relative inflation and GDP growth, but the process of convergence appears to be rather slow. In the short term the capital inflows associated with current account deficits put substantial upward pressure on the relative price inflation, while the Balassa-Samuelson effect appears to be subdued
- JEL-Codes: E31, O57, P24
- Keywords: real convergence, nominal convergence, real exchange rate, inflation, transition economies
-
No. wp2010-03
(Download at EconPapers)
- Rasmus Kattai
- Potential output and the output gap in Estonia - a macro model based evalutaion
There have been several data revisions to the output statistics in Estonia during the past six years as methodologies have been harmonised. These changes are significant enough to require corrections to the earlier understanding of Estonia's potential economic growth rate. In this paper the latest data vintage from 2009 is used to estimate Estonia's potential output growth and output gap. The production function approach that has been used shows that the gap varies quite extensively, ranging from -8% in 1999 to +8% in 2007, while the average potential growth rate in 1997-2009 was around 6%. The macro model simulations expect the potential growth rate to fall in the future. The fall in the marginal productivity of production inputs makes growth slow to about 4-5% in the next five years, if there are no additional shocks to the economy
- JEL-Codes: E32, F43
- Keywords: potential output, potential growth, output gap
-
No. wp2010-02
(Download at EconPapers)
- Karsten Staehr
- The global financial crisis and public finances in the New EU Countries from Central and Eastern Europe
This paper discusses the public finances of the 10 new EU Countries from Central and Eastern Europe, with particular emphasis on the effects of the global financial crisis that started in 2008. The budget outcomes have differed markedly across the new EU countries, both before and during the crisis. The direct impact of the crisis on public finances was limited, but the severe downturns have strained public finances and increased debt ratios considerably. Estimations of budget reaction functions reveal that the budget balance has, in general, been moderately counter-cyclical, but also that the counter-cyclicality derives entirely from the revenue side. The medium-term fiscal outlook rests, to a large extent, on growth prospects. The uncertainties regarding future economic
- JEL-Codes: H6, E62, P27
- Keywords: global financial crisis, fiscal policy, budget reaction functions, Central and Eastern Europe
-
No. wp2010-01
(Download at EconPapers)
- Rasmus Kattai
- Credit risk model for the Estonian banking sector
This paper gives an overview of the credit risk model that has been developed for the Estonian banking system. The non-performing loans and loan loss provisions of the four largest banks and the rest of the banking sector have been modelled conditional on the underlying economic conditions: economic growth, unemployment, interest rates, in- flation, indebtedness and credit growth. The model highlights the importance of economic growth as the most influential factor behind the soundness of the banking sector in the latest downturn. The expected fall in output volatility will probably decrease the relative importance of output growth and increase the role of interest rates in the future.
- JEL-Codes: E32, E37, G17, G21
- Keywords: credit risk, stress testing, financial soundness indicators, Estonian banking sector
-
No. wp2007-8
(Download at EconPapers)
- Dmitry Kulikov and Karsten Staehr
- Microeconometric analysis of household saving in Estonia: income, wealth, financial exposure
This paper ascertains the determinants of household saving in Estonia based on a microeconometric analysis of household budget surveys from 2002 to 2005. Higher income leads to more saving, but the effect is largest for unanticipated income shocks. Ownership of real estate does not affect saving, while possession of durable goods like cars is associated with lower savings. A number of variables reflecting the households' financial exposure are of importance. Deposits, other forms of financial assets and access to liquidity reduce household saving. Surprisingly, debt and leasing liabilities and existing debt servicing payments also lead to lower savings. Young and in particular older households have a higher propensity to save than middle-aged households, while higher education is associated with lower savings. The results are robust to changes in the specification of the saving measure and the choice of estimation method.
- JEL-Codes: D12, D14, D22
- Keywords: household saving, saving hypotheses, financial exposure
-
No. wp2000-02
(Download at EconPapers)
- Iikka Korhonen and Mare Randveer
- Assessment of the Euros's implications for European
economic development.
This paper assesses the impacts of Economic and Monetary Union and the euro on developments within the EU and
globally. The emphasis is on euro-11 countries and the eight most advanced accession candidates in Central and
Eastern Europe. The single currency completes the project for a single market in Europe, and overall, clear efficiency
gains for participating countries are expected. Low, stable interest rates should spur investment and the single
currency should promote the formation of large, liquid capital markets, eventually transforming the structure of
financial intermediation within the euro area. Although participating countries achieved a high degree of nominal
convergence in the 1990s, this process now appears to have ended. Moreover, the conduct of a common monetary
policy becomes more problematic with countries at different phases in the economic cycle.
-
No. 2009-5
(Download at EconPapers)
- Paolo Gelain and Dmitry Kulikov
- An estimated dynamic stochastic general equilibrium model for Estonia
This paper presents an estimated open economy dynamic stochastic general equilibrium model for Estonia. The model is designed to highlight the main driving forces behind the Estonian business cycle and to understand how euro area economic shocks and its monetary policy affect the small open economy of Estonia. The model described in this paper is a two-area DSGE model incorporating New Keynesian features such as nominal price and wage rigidity, variable capital utilization, investment adjustment costs, as well as other typical features - both for the domestic and euro area part of the model. It is rich in structural shocks such as technology, consumption preference, mark-up, etc. The model is estimated by Bayesian techniques using a quarterly data sample that covers main macroeconomic aggregates of Estonia and the euro area. The ultimate goal of the new model is for it to be used in simulation exercises, policy advice and forecasting at the Bank of Estonia
- JEL-Codes: E4, E5
- Keywords: monetary policy, New Keynesian models, small open economy, Bayesian statistical inference
-
No. 2009-3
(Download at EconPapers)
- Jan Babecky, Philip Du Caju, Theodora Kosma, Martina Lawless, Julian Messina and Tairi Room
- Downward nominal and real wage rigidity :survey evidence from European firms
Firms have multiple options at the time of adjusting their wage bills. However, previous literature has mainly focused on base wages. We broaden the analysis beyond downward rigidity in base wages by investigating the use of other margins of labour cost adjustment at the firm level. Using data from a unique survey, we find that firms make frequent use of other, more flexible, components of compensation to adjust the cost of labour. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by firm and worker characteristics
- JEL-Codes: J30, C81, P5
- Keywords: labour costs, wage rigidity, firm survey, European Union
-
No. 2009-2
(Download at EconPapers)
- Andrew Hughes Hallett, Rasmus Kattai and John Lewis
- Can we rely on real time figures for cyclically adjusted budget balances?
This paper analyses the reliability of real time estimates of cyclically adjust budget balances (CABs). We find that real time CABs are not better at forecasting the ex post figures than simpler benchmarks. Further, we find that real time CABs have low power in detecting fiscal slippages, and in correctly identifying fiscal improvements. Around half of the real time errors in CABs can be attributed to revisions in the cyclical component of the budget balance, and around one half to revisions in the deficit to GDP ratio across vintages. That means it will be difficult to use them to reliably monitor the health of public finances. Lastly, we find that CABs are systematically less reliable under conditions of poor or deteriorating public finances, which means they are at their most unreliable precisely when they are needed most
- JEL-Codes: H62, H87
- Keywords: real time data, cylically adjusted budget deficits, measurement error
-
No. 2009-01
(Download at EconPapers)
- Martti Randveer and Tairi Room
- The structure of migration in Estonia: survey-based evidence
This paper presents new evidence from a unique survey of firm managers on migration patterns in Estonia in 2007. An average emigrant from Estonia was most likely a young person between 15-34 years of age, a blue-collar worker and male. Contrary to evidence from other countries and/or earlier time periods, employees with a low level of education were more likely to emigrate than highly educated workers. We assessed which enterprises were more exposed to the crossborder movement of workers. The vast majority (97%) of emigrants left from private sector enterprises. Most immigrant workers were employed by private sector companies as well. Firms hiring a larger share of low-skilled blue-collar workers were more exposed to the mobility of international labour. The regression results indicated that the tendency to emigrate was the strongest among construction sector employees, whereas immigrant workers were most likely hired by manufacturing companies
- JEL-Codes: F22, J61, J62
- Keywords: immigration, emigration, survey
-
No. 2008-07
(Download at EconPapers)
- Lenno Uuskula
- Limited participation or sticky prices? New evidence from firm entry and failures
Traditional models of monetary transmission such as sticky price and limited participation abstract from firm creation and destruction. Only a few papers look at the empirical effects of the monetary shock on the firm turnover measures. But what can we learn about monetary transmission by including measures for firm turnover into the theoretical and empirical models? Based on a large scale vector autoregressive (VAR) model for the U.S. economy I show that a contractionary monetary policy shock increases the number of business bankruptcy filings and failures, and decreases the creation of firms and net entry. According to the limited participation model, a contractionary monetary shock leads to a drop in the number of firms. On the contrary the same shock in the sticky price model increases the number of firms. Therefore the empirical findings support more the limited participation type of the monetary transmission
- JEL-Codes: E32, C32
- Keywords: monetary transmission, limited participation, sticky prices, firm entry, firm bankruptcy, structural VAR
-
No. 2008-06
(Download at EconPapers)
- Jaanika Merikull and Karsten Staehr
- Unreported employment and tax evasion in mid-transition : comparing developments and causes in the Baltic States
This paper compares the prevalence and determinants of unreported
employment in the three Baltic States in 1998 and 2002 using a hitherto
little used dataset. The prevalence of unreported employment varies
substantially across the three countries and across the two sampling
years. Microeconometric estimations show that firm-related characteristics,
such as sectoral activity, firm size and employment trends, are
important determinants of unreported employment in all three countries,
whereas the impact of individual factors varies across countries and
time. It is shown that only 10�30 percent of the changes in unreported
employment between 1998 and 2002 can be accounted for by changes
in individual characteristics and firm-related factors. Provisional calculations
suggest that the net gain for individuals undertaking unreported
employment is modest, in particular among individuals who regularly
engage in such activities
- JEL-Codes: H26, H24, D19
- Keywords: Unreported employment, informal employment, envelope wages, tax evasion
-
No. 2008-05
(Download at EconPapers)
- Lenno Uuskula
- Liquidity and productivity shocks: A look at sectoral firm creation
Only a few papers consider the sectoral effects of aggregate shocks.
But do the shocks have homogeneous effects across sectors? This paper
looks at the impact of liquidity and neutral productivity shocks on the
creation of firms across 8 sectors in Estonia. I show that the sectoral
heterogeneity in the reaction is low for liquidity shocks and high for
technology shocks. An increase in liquidity leads to a uniform growth
in the creation of firms across sectors with the exception of the financial
sector. An increase in the labor productivity shock the entry of firms
permanently in sectors that are traditionally considered to be producing
tradables, such as transport or manufacturing. The increase in the
creation of firms is short and close to zero in the long run in the nontradable
sectors, such as retail and whole sale, real estate, and hotels and
restaurants.
- JEL-Codes: E32, C32
- Keywords: VAR, liquidity shocks, technology shocks, firm entry
-
No. 2008-04
(Download at EconPapers)
- Karsten Staehr
- The Maastricht Inflation
Criterion and the New EU
Members from Central and
Eastern Europe
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
- JEL-Codes: E31, E61, F55
- Keywords: Monetary Union, inflation, Maastricht inflation criterion, CEE
-
No. 2008-03
(Download at EconPapers)
- Karsten Staehr
- Estimates of employment and welfare effects of personal labour income taxation in a flat-tax country : The case of Estonia
This paper presents estimates of the employment and welfare effects of personal labour income taxation in Estonia. The labour supply decision of individuals is estimated based on data from the 2005 Estonian Labour Force Survey. Economic incentives are found to affect the participation decisions of individuals, but not the number of hours worked by individuals already working. The participation elasticities are higher for individuals in the middle income groups than for individuals in the low and high income groups. Increasing the proportional tax rate by 1 percentage point is found to reduce total employment by 0.35 percentage points. The baseline estimate of the marginal cost of public funds is 1.6 if the proportional tax rate is increased and 1.8 if the basic exemption is lowered. The marginal cost of public funds varies across different income groups, which may suggest possible gains in efficiency from reallocating the taxation burden of the existing system of proportional taxation. The employment and welfare estimates are subject to substantial
- JEL-Codes: H21, H24, J21, J22
- Keywords: taxation, labour supply, welfare, excess burden
-
No. 2008-02
(Download at EconPapers)
- Christian Schulz
- Forecasting economic activity for Estonia : The application of dynamic principal component analyses
In this paper, the dynamic common factors method of Forni et al. (2000) is applied to a large panel of economic time series on the Estonian economy. In order to improve forecasting of economic activity in Estonia, we derive a leading indicator composed of the common components of twelve series, which were identified as leading. The resulting indicator performs better than two other indicators, which are based on a small-scale state-space model used by Stock and Watson (1991) and a large-scale static principal components model used by Stock and Watson (2002), respectively. It also clearly outperforms the naive benchmark in both in-sample and out-of-sample forecast comparisons
- JEL-Codes: C32; C33; C53; E37
- Keywords: Estonia, forecasting, turning points, dynamic factor models, dynamic principal components, forecast performance
-
No. 2008-01
(Download at EconPapers)
- Jaanika Merikull
- The impact of innovation on employment: firm- and industry-level evidence from Estonia
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
- JEL-Codes: J23, O33, D21
- Keywords: innovation (technological change), employment, catch-up economy
-
No. 2007-11
(Download at EconPapers)
- John Lewis and Karsten Staehr
- The Maastricht inflation criterion : what is the effect of expansion of the European Union ?
Following the Maastricht criteria, a country seeking to join the European Monetary Union cannot have inflation in excess of 1.5 percent plus the average inflation in the three "best performing" EU countries. This inflation reference value is a non-increasing function of the number of EU members. Looking backwards, the effect of increasing the number of EU countries from 15 to 27 would have been sizeable in 2003 and 2004, but relatively modest since 2005. Monte Carlo simulations show that the expansion of the EU from 15 to 27 members reduces the expected inflation reference value by 0.15-0.2 percentage points, but with a considerable probability of a larger reduction. The treatment of countries with negative inflation in the calculation of the reference value has a major impact on the results
- JEL-Codes: E31, E42, E63
- Keywords: Maastricht Treaty, European Monetary Union, inflation, convergence
-
No. 2007-10
(Download at EconPapers)
- Aaro Hazak and Kadri Mnnasoo
- Indicators of corporate default : an EU based empirical study
The present paper contributes to the research on the indicators that provide a warning of company failure by employing micro and macro variables within a framework of survival analysis using a sample of 0.4 million companies from the European Union (EU). The sensitivity of the results is checked using two complementary event definitions - bankruptcy and negative equity. Our results imply that the baseline hazard of a default is a U-shaped function of the time the company has survived. High leverage and a low return on assets appear to be strong predictors of failure. Macroeconomic variables give mixed evidence for old and new member states as well as for the two default definitions
- JEL-Codes: G33, C41
- Keywords: corporate default, bankruptcy, survival analysis
-
No. 2007-09
(Download at EconPapers)
- Christian Schulz
- Forecasting economic growth for Estonia : application of common factor methodologies
In this paper, the application of two different unobserved factor models to a data set from Estonia is presented. The small-scale state-space model used by Stock and Watson (1991) and the large-scale static principal components model used by Stock and Watson (2002) are employed to derive common factors. Subsequently, using these common factors, forecasts of real economic growth for Estonia are performed and evaluated against benchmark models for different estimation and forecasting periods. Results show that both methods show improvements over the benchmark model, but not for the all the forecasting periods
- JEL-Codes: C53, C22, C32, F43
- Keywords: Estonia, forecasting, principal components, state-space model, forecast perfomance
-
No. 2007-07
(Download at EconPapers)
- Aurelijus Dabuinskas and Dmitry Kulikov
- New Keynesian Phillips
curve for Estonia,
Latvia and Lithuania
This paper presents an empirical analysis of the inflation process in
Estonia, Latvia and Lithuania within the framework of the New Keynesian
Phillips Curve (NKPC) model of Gal and Gertler (1999) and Gal
et al. (2001). An open economy extension by Leith and Malley (2003)
and a NKPC model that explicitly incorporates energy into the average
real marginal cost measure are also considered. The primary focus of the
paper is to identify and compare the underlying structural parameters of
the NKPC model across the three Baltic economies.
Empirical NKPC model estimates point to a limited role of the cost
measure in determining inflation dynamics in the three Baltic countries.
It has been found that the inflation process in these countries primarily
depends on inflation expectations and past inflation rates. Price setting
flexibility, as measured by the price stickiness parameter, tends to be
lower than in the euro area but higher than in the US, while the share of
backward-looking price setters is found to be higher on average.
- JEL-Codes: E31 ; C22
- Keywords: New Keynesian Phillips Curve, inflation dynamics, open economy,
-
No. 2007-06
(Download at EconPapers)
- Lenno Uuskula
- Firm entry and liquidity
This paper shows that fewer firms enter after a contractionary liquidity
shock and that firm entry reacts quicker to liquidity than the economic
activity indicator. The results are obtained by using Estonian data
for the period 1995M1�2006M7. Various structural VAR and VECM
models are exploited to identify the liquidity shock.
- JEL-Codes: E52 ; C32
- Keywords: monetary transmission, firm entry, VAR, VECM, Estonia
-
No. 2007-04
(Download at EconPapers)
- Kadri Mnnasoo
- Determinants of firm sustainability in Estonia
This paper examines the determinants of firm sustainability in Estonia using discrete-time survival analysis with a complementary log-log hazard function. A firm is defined as sustainable if it meets the minimum capital requirement set by the law, and if it does not then it is described as being "distressed". The definition of "in default" stipulates that not only must the firm be short of the required capital, but it should also have exited or dropped out altogether. This study confirms the stylized fact that firms face higher risk during their start-up period. Firm distress and default hazard decrease over time, the latter however, non-monotonically being lagged relative to distress. At the industry level, manufacturing firms demonstrate a higher degree of robustness compared to trade and services companies. Most importantly, however, firm sustainability positively depends on efficiency, good stable asset return, low leverage and a large assets base
- JEL-Codes: G33, C41
- Keywords: firm default, survival analysis
-
No. 2007-03
(Download at EconPapers)
- Karsten Staehr
- Fiscal policies and business cycles in an enlarged euro area
This paper compares the cyclical properties of fiscal policies across the 12 original eurozone countries and the future members from Central and Eastern Europe. For the sample period 1995-2005, the fiscal balance exhibits less inertia and is more counter-cyclical in Central and Eastern European countries than in members of the eurozone. The main differences arise from the revenue side. Differences in the formation of fiscal policy between current and future eurozone countries decrease over time. Autonomous fiscal policy has little or no effect on cyclical variability in either of the two groups of countries. Counter-cyclical fiscal policy appears to be effective in Central and Eastern European countries, but largely ineffective in eurozone countries
- JEL-Codes: E62, E63, E32
- Keywords: fiscla policy determinants, fiscal policy effects, eurozone expansion
-
No. 2007-02
(Download at EconPapers)
- Andrew Hughes Hallett, Rasmus Kattai and John Lewis
- Early warning or just wise after the event? The problem of using cyclically adjusted budget deficits for fiscal surveillance
The effectiveness of cyclically adjusted balances (CABs) as an indicator of the health of public finances depends on the accuracy with which cyclically adjusted figures can be calculated in real time. This paper measures the accuracy of such figures using a specially constructed real time dataset containing published values of deficits, output gaps and cyclically adjusted deficits from successive issues of OECD economic outlook. We find that data revisions are so great that real-time CABs have low power in detecting fiscal slippages as defined by the ex post data.
- JEL-Codes: H62, H68
- Keywords: fiscal surveillance, cyclically adjusted budget balance, real time data
-
No. 2007-01
(Download at EconPapers)
- Rasmus Kattai
- Constants do not stay constant because variables are varying
This paper focuses on the dynamic properties of error correction models (ECM). It is shown that the absence of structural breaks in the cointegrating vector does not necessarily imply that also all parameters of the dynamic specification of the ECM are time invariant. In some cases, depending on the data generating process of regressors, the intercept has to be time varying in order to have the long run equilibrium of a dynamic model independent of the growth rates of the variables out of sample period, i.e. to satisfy the dynamic homogeneity condition. It is found to be common when estimating ECMs on macroeconomic time series of converging countries. Dynamic homogeneity can be achieved by imposing the state dependent dynamic homogeneity restriction on the intercept. Applying the restriction is illustrated by an empirical example using Estonian data on real wages and labour productivity
- JEL-Codes: C32, C51
- Keywords: dynamic homogeneity, error correction models, forecasting
-
No. 2006-08
(Download at EconPapers)
- Aurelijus Dabuinskas and Martti Randveer
- Comparison of pricing behaviour of firms in the euro area and Estonia
In this paper, we review the price setting survey of Estonian firms and compare our findings with the results of similar research in the euro area summarized by Fabiani et al. (2005). Generally, the price setting patterns that emerge from our survey are quite similar to those in the euro zone. There is some evidence, however, that price setting may be somewhat more flexible in Estonia. The findings that suggest more price flexibility in Estonia are as follows: the incidence of time-dependent pricing is lower, the share of firms that are price takers is larger, price changes are more frequent, and, finally, the speed of price adjustments to shocks is higher
- JEL-Codes: E30, D40
- Keywords: price setting, nominal rigity, inflation persistence, price survey
-
No. 2006-07
(Download at EconPapers)
- Priit Vahter
- Productivity in Estonian enterprises: the role of innovation and competition
This paper provides some stylised facts about differences in labour productivity and total factor productivity (TFP) in Estonian firms and about the role of selected determinants of productivity differences. Enterprise level panel data of the whole population of Estonian firms from years 1995-2002 is used.
It appears that the variation of productivity indicators in Estonia is much greater than in Western Europe. Although there is a lot of entry and exit of firms, there is not much movement within the productivity distribution of surviving .rms. It is found that both innovation and less concentrated market structure seem to be positively related to higher productivity of firms
- JEL-Codes: G3; L2; O31; O4
- Keywords: productivity, competition, innovation, market structure
-
No. 2006-06
(Download at EconPapers)
(published)
- Thomas A. Eife
- Price setting behaviour and price setting regulations at the euro changeover
This paper documents that the impact of the euro changeover in January 2002 on prices was not uniform across the 12 participating countries. There are countries where prices increased significantly, but there are also countries where price-setting behaviour during the changeover does not appear to be very different from other points in time. This paper argues that the above difference can be explained by looking at the way countries regulated price setting during the changeover, and that any impact of the changeover could have been avoided with appropriate regulations. The gap between the actual and the perceived impact is addressed and policy recommendations for future changeovers are provided
- JEL-Codes: E31; E60; L11
- Keywords: currency changeover, euro, economic policy, prices, perceived inflation
-
No. 2006-04
(Download at EconPapers)
(published)
- Andres Vesilind
- Profitability of simple trading strategies exploiting the forward premium bias in foreign exchange markets and the time premium in yield curves
This paper focuses on two actively studied inefficiencies in financial markets: the forward premium bias in foreign exchange markets (see, for example, Hansen and Hodrick 1980, Fama 1984, Bansal and Dahlquist 2000, etc.) and the empirical finding that the time expectations theory performs relatively poorly in describing the average shape of yield curves (for a list of papers see, for example, Backus et al. 1998, p 1). The goal of the article is to test whether these two inefficiencies can still offer the possibilities of earning positive and stable excess return for investors. For that purpose, first two very simple trading strategies are tested based on the abovementioned inefficiencies: buying the currencies of the countries with higher short-term interest rates against the currencies of the countries with lower short-term interest rates (i.e. simple FX carry-strategy) and holding long-only positions in longerterm interest rate futures.
The results show that the two studied risk premiums are still present in the markets and enable investors to earn excess returns even with simple strategies. Additional tests show that the performance of these simple strategies can be further improved by the inclusion of a risk factor in the foreign exchange carry-strategy and by the addition of monetary policy direction and yield curve steepness filters in the long-only strategy in interest rate futures.
- JEL-Codes: E44; E47; E58; F37; G11; G15
- Keywords: trading rules, forward premium bias, time expectations theory
-
No. 2006-03
(Download at EconPapers)
(published)
- Agostino Consolo
- Forecasting measures of inflation for the Estonian economy
The aim of this paper is to forecast some of the most important measures of inflation of the Estonian economy by making use of linear and non-linear models. Results from comparing classes of optimal models are similar to those in the forecasting literature. In particular, there are gains from using more sophisticated methods such as factor analysis and time-varying parameters methods.
Model discrimination is based on evaluation criteria which are computed by a real-time dynamic estimation procedure. Moreover, forecasts uncertainty is appropriately taken into account: Fan Charts can exhaustively describe the final output for what concerns out-of-sample forecasting.
- JEL-Codes: C22; C32; C53; E31
- Keywords: Estonian Economy, forecasting, inflation modelling
-
No. 2006-02
(Download at EconPapers)
(published)
- Karin Jeveer
- Sources of capital structure : evidence from transition countries
This study explores the significance of firm-specific, country institutional and macroeconomic factors in explaining the leverage variation of a sample of firms from nine Eastern European countries. Countryspecific factors are the most prominent determinants of leverage variation for small unlisted companies while firm-specific factors explain most of the leverage variation in listed and large unlisted companies. Half of the leverage variation related to country factors is explained by known macroeconomic and institutional factors while the other half by unquantifiable institutional differences
- JEL-Codes: G32
- Keywords: capital structure, Eastern Europe
-
No. 2006-01
(Download at EconPapers)
(published)
- Nektarios Aslanidis
- Business Cycle Regimes in CEECs Production:
a Threshold SUR Approach
The aim of this paper is to study economic activity in CEECs and to look at the transmission of economic activity between the euro area and CEECs. Econometric techniques appropriate for a threshold seemingly unrelated regressions specification are developed to take account of factors that are common to all CEECs. This methodology also allows for asymmetries in the activity of the CEECs governed by the overall euro area activity. The results show slow growth for most CEECs when the euro area economy decelerates, but high growth when the euro area economy grows.
- JEL-Codes: C50;E32
- Keywords: threshold SUR, asymmetry, business cycles
-
No. 2005-6
(Download at EconPapers)
(published)
- Andres Vesilind and Toivo Kuus
- Application of investment models in foreign exchange reserve management in Eesti Pank
This paper describes active investment strategy used in the central bank of Estonia and introduces model-based investment decisions as a component of that strategy. The first chapter of the paper describes the evolution of the investment process in Eesti Pank and outlines the framework of reserve management. It describes the role of several forms and styles of investing: active and passive management, qualitative and quantitative management, emphasizing the role of diversification for achieving better performance. The chapter concludes with the description of the investment strategy used in the central bank of Estonia.
The second chapter describes model-based investing as part of active management strategy. Three investment models are estimated and tested: a model for directional positions in the US, German and Japanese 10-year government bond futures, a model for cross-currency positions in ten major currencies, and a model for cross-country yield spread trades in eight major government bond markets. The models extend the framework developed by Ilmanen and Sayood (Ilmanen et al. 2002). After the model estimation the models are combined with a trend-following model and the whole set of diversified models is tested. Finally, correlation study of these results with the results of external asset managers and in-bank discretionary analysis is performed. The paper ends with a discussion on the possibilities for further development of the quantitative investment program and conclusions.
- JEL-Codes: E44; E47; E58; F37; G11; G15
- Keywords: trading rules, active management, central bank reserves
-
No. 2005-4
(Download at EconPapers)
(published)
- Janek Uiboupin
- Short-Term Effects of Foreign Bank Entry on Bank Performance in Selected CEE Countries
This paper analyses the short-term impact of foreign bank entry on bank performance
in ten Central and Eastern European countries. A panel of 319 banks was analysed
over the period 19952001. The Arellano-Bond dynamic panel estimation technique
was used. The results indicate that foreign bank entry is associated with lower beforetax
profits, non-interest income, interest income on interest earning assets and loan
loss provisions. Foreign bank entry tends to increase the overhead costs of local banks
in the short-run. The results generally indicate that foreign bank entry enhances
competition on the market. The role the development of the banking sector plays in
regard to the effects of foreign bank entry was analysed. Research results show that in
more developed banking markets, foreign bank entry is associated less with
decreasing incomes and loan loss provisions than in less developed banking markets.
In more developed markets, the overhead costs of banks are less likely to increase.
The results show that banks with a higher market share react less to foreign banks
entering the market.
- JEL-Codes: E44; G21
- Keywords: foreign bank entry, financial development, domestic banking
-
No. 2005-3
(Download at EconPapers)
(published)
- Lenno Uuskula, Peeter Luikmel and Jana Kask
- Critical Levels of Debt?
High credit growth in Central and Eastern European countries (CEEC) over recent years has sparked interest among many market analysts. Although banking supervision has improved, the continuation of such growth may cause concern about the threat of financial crisis. This paper is written with the aim of analysing the importance of debt factors as a potential cause of financial crises. First, a comparison is conducted of various debt indicators from episodes of crisis in banking across European countries since the 1970s. Second, a probit analysis is used to measure the probability of a crisis. Based on this analysis, it can be claimed that any direct link between debt indicators and financial crises is weak. However, there is some evidence that once the crisis occurs, greater indebtedness lengthens the crisis and raises costs in terms of GDP.
- JEL-Codes: C23; E44; F34; G20
- Keywords: financial crisis, indebtedness indicators
-
No. 2005-2
(Download at EconPapers)
(published)
- Marit Hinnosaar, Hannes Kaadu and Lenno Uuskula
- Estimating the equilibrium exchange rate of the Estonian kroon
The paper presents empirical estimations of the equilibrium exchange rate of the Estonian kroon. The behavioural equilibrium exchange rate (BEER) approach is used to analyse the dynamics of the real effective exchange rate in the time period from 1995 to 2002. The estimates range from a 15% undervaluation to a small overvaluation of the kroon in the beginning of the period and indicate a position close to equilibrium in 2002.
- JEL-Codes: C22; F31
- Keywords: equilibrium exchange rate, BEER, cointegration, Estonia
-
No. 2005-13
(Download at EconPapers)
(published)
- Priit Vahter and Jaan Masso
- Home Versus Host Country Effects of FDI: Searching for New Evidence of Productivity Spillovers
The aim of this paper is to study the effects of both inward and outward foreign direct investment (FDI) on productivity. The main novelty is the analysis of the spillover effects of outward FDI that may occur outside the investing firms on the rest of the home country. The effects are addressed both for the manufacturing and services sectors. To our best knowledge there have so far been no studies based on enterprise-level panel data analysing the spillovers of outward FDI in the production function estimation framework. We find that engaging in outward FDI or receiving inward FDI is positively related to the productivity of the parent firm in Estonia or the subsidiary in Estonia. We do not find much evidence of positive spillovers via outward or inward FDI that is robust to the specification of the model or does not depend on the sector being studied. The results on spillover effects vary according to different specifications of the spillover variable, sector or the model, being either statistically insignificant or, in some cases, positive.
- JEL-Codes: F10, F21, F23
- Keywords: foreign direct investment, spillovers, home country effects, productivity
-
No. 2005-12
(Download at EconPapers)
(published)
- Rasmus Kattai
- EMMA - A Quarterly Model of the Estonian Economy
This paper describes the first version of Eesti Pank's structural macro-econometric model EMMA. EMMA belongs to the second generation of macro models, with Neo-Classical supply determined long run properties and Keynesian demand driven short run adjustment.
The model has been designed for forecasting as well as for simulation exercises. In order to fulfil both tasks, the emphasis has been put on capturing the main characteristics of the Estonian economy.
The model describes a very small and open economy, in which long run economic growth and inflation are strongly influenced by real and nominal convergence towards EU15 levels.
- JEL-Codes: C5, E12, E17
- Keywords: Estonia, macro model
-
No. 2005-11
(Download at EconPapers)
(published)
- Priit Vahter
- Which Firms Benefit More From Inward Foreign Direct Investment?
In the study of the effects of foreign direct investment (FDI) on host countries, an interesting question that is highly relevant to government policy concerning FDI is whether the benefits of inward FDI both as "own-firm" effects of FDI in foreign subsidiaries and positive spillover effects for other firms are captured to a larger extent by certain types of enterprises in the host economy? Are there particular characteristics (often called absorptive capacity, e.g. by Cohen, Levinthal 1989) that determine whether a firm can benefit from positive spillovers? In this paper I will try to assess these issues based on enterprise level panel data from Estonia. I find that for the total factor productivity effects of FDI at the subsidiary level, characteristics such as export or domestic market orientation of the affiliate may be important. I do not find that selected indicators such as exporting, R&D activity or intensity of technology in the sector are important for benefiting from horizontal spillovers of FDI in Estonia.
- JEL-Codes: F10, F21, F23
- Keywords: foreign direct investment, productivity, spillovers, absorptive capacity
-
No. 2005-10
(Download at EconPapers)
(published)
- Danny Pitzel and Lenno Uuskula
- The Effect of Financial Depth on Monetary Transmission
Several papers have looked at the relationship between country-specific factors and the strength of monetary transmission. Cecchetti (1999) concentrated on legal aspects, De Grauwe and Storti (2004) more on the financial structure of the economy. The objective of this paper is to measure how financial development variables influence the strength of monetary transmission in European countries. This paper employs a meta-analysis technique that has gained much popularity in recent years. According to the results, monetary transmission in Europe is strongly influenced by financial depth and structure.
- JEL-Codes: E3, E4, E5, E6
- Keywords: monetary transmission, financial depth, meta-analysis
-
No. 2005-09
(Download at EconPapers)
(published)
- Ott-Siim Toomet
- Does an Increase in Unemployment Income Lead to Longer Unemployment Spells?
Evidence Using Danish Unemployment Assistance Data
Danish unemployment assistance depends on age; it increases by 70% when unemployed individuals turn 25. This feature is used to identify the impact of income on the unemployment-to-employment hazard rate. A mixed proportional hazard framework based on a 10% representative Danish registry data set is used. The results indicate that the income effect for females is negative and significant, corresponding to an income elasticity of -0.4. The effect for males is positive but insignificant.
- JEL-Codes: J64, J65
- Keywords: welfare benefits, incentive effect, unemployment duration
-
No. 2005-08
(Download at EconPapers)
(published)
- Kadri Mnnasoo and David G Mayes
- Investigating the Early Signals of Banking Sector Vulnerabilities in Central and East European Emerging Markets
This paper considers the joint role of macro-economic and bankspecific factors in explaining the occurrence of banking problems in the twenty-one Central and East European emerging markets over the recent decade. Using data at the individual bank level we show, using a logit model, that the macroeconomic factors play a central role in determining banking sector instability in the early stages of difficulty, while the bankspecific factors are more important in the later stages and gain more weight as the banking sector develops and the institutional framework becomes mature.
- JEL-Codes: E44, G21
- Keywords: banking sector vulnerability, banking crises, early warning indicators, Central and Eastern Europe
-
No. 2005-07
(Download at EconPapers)
(published)
- Aurelijus Dabuinskas
- Money and Prices in Estonia
This paper examines the relationship between money and prices in Estonia in the period 1997Q1-2003Q3. The concept of a price (or real money) gap suggested by the P-star theory is applied to investigate whether information about the current money stock can be used to explain and/or predict GDP deflator inflation over the sample period. The results show that the money gap measure dominates the output gap as an explanatory variable for inflation in the short run. However, the money gap does not seem to be a proper indicator for predicting inflation over longer horizons, say, 12 months ahead. There are some signs that the output gap is becoming a better indicator of future inflation over time, but more data are needed to confirm this hypothesis.
- JEL-Codes: E31; E41
- Keywords: P-star, inflation, money demand
-
No. 2005-05
(Download at EconPapers)
(published)
- Rasmus Kattai and John Lewis
- Hooverism, Hyperstabilisation or
Halfway-House?
Describing Fiscal Policy in Central and
Eastern European EU Members
This paper develops a simple framework for describing fiscal policy where policymakers attempt to minimise deviations in output and budget balance from target values. Optimal policy is given by minimising a quadratic loss function subject to a linear structure of the economy. This policy can be viewed as weighted average of two polar cases - the case where the budget deficit adjusts to eliminate any deviations from potential output (hyperstabilisation), and the case where taxes and spending are determined exclusively by some budgetary goal (hooverism). We find some evidence of stabilisation for Poland, Latvia and Estonia. There is no evidence for the Czech Republic, Lithuania, Slovakia and Slovenia, suggesting that fiscal policy was being used for other objectives. The best fit is for Estonia, suggesting that a strict fiscal policy environment may not be incompatible with stabilising fiscal policy.
- JEL-Codes: E61; E62
- Keywords: Fiscal Policy, Fiscal Policy Rules, New EU Member States
-
No. 2004-7
(Download at EconPapers)
(published)
- Hannes Kaadu and Lenno Uuskula
- Liquidity Constrains and Ricardian Equivalence in Estonia
This paper aims to find evidence of the influence of government deficit on private consumption in Estonia. The data only shows some support for Ricardian equivalence. Two approaches were used in the empirical tests. The Haque and Montiel (1989) equation of consumption was estimated using an instrumental variables technique. The Aschauer (1985) system of equations was estimated with the full information maximum likelihood method. Formal tests based on macro data could neither reject nor confirm the existence of liquidity constraints or Ricardian equivalence. There remains a lot of room for testing both of these hypotheses in Estonia. Further efforts to test liquidity constraints should concentrate on using micro data.
- JEL-Codes: E21, E62, H62
- Keywords: Ricardian equivalence, liquidity constraints, Estonia
-
No. 2004-6
(Download at EconPapers)
(published)
- Reimo Juks
- The importance of the bank-lending channel in Estonia: evidence from micro-economic data
The paper studies the importance of the bank-lending channel in Estonia. The results from the descriptive evidence suggest that there is a significant share of bank dependent borrowers in Estonia, but the impact of a monetary policy shock on the loan supply of banks seems to be ambiguous. The empirical analysis provides evidence in favour of the bank-lending channel in Estonia. First, well-capitalized banks seem to experience a smaller outflow of deposits after a monetary contraction. Second, the liquidity position of banks seems to be an important determinant of the loan supply suggesting that more liquid banks are able to maintain their loan portfolios, while less liquid banks must reduce their loan supply after a monetary policy contraction. This finding is consistent with the evidence for the euro area, where liquidity is also the most important determinant of the loan supply.
- JEL-Codes: E52; G21; G32; C33
- Keywords: bank lending channel; monetary policy transmission
-
No. 2004-5
(Download at EconPapers)
(published)
- Marit Hinnosaar
- Estonian labor market institutions within a general equilibrium framework
The implications of the Estonian labor market policy reforms, such as changes to the minimum wage, social benefits and tax allowance, will be analysed using a simple applied general equilibrium model. The model used in the paper is from Bovenberg et al (2000), with the addition of an efficiency wage section based on Shapiro and Stiglitz (1984). The model integrates union bargaining and efficiency wage theory into a traditional CGE model framework.
- JEL-Codes: D58; E62; J32; J50
- Keywords: computable general equilibrium models, unemployment, lowskilled labor, minimum wage, benefits, tax allowance
-
No. 2004-3
(Download at EconPapers)
(published)
- Mrten Kress
- Lending cycles in Estonia
The objective of this paper is to examine possible cyclical patterns in the lending behavior of Estonian commercial banks. Furthermore, the degree of cycle synchronization between the business cycle and the credit cycle and how much one cycle is behind the other in the case of Estonia is of particular interest. The paper uses data from between January 1994 and February 2004 to identify the Estonian business and credit cycles and compare their features. A Markov regime-switching technique was used in dating both business and credit cycles. Variables of interest in terms of the credit cycle include the total amount of loans provided by commercial banks, household loans, corporate loans, and the share of overdue loans in the total portfolio. Both, monthly and quarterly data was utilized to double-check the results and the business cycle was dated using the Industrial Production Index (IPI) and GDP, respectively. The share of overdue loans in the total portfolio appeared to be counter-cyclical as expected. Changes in the IPI seemed to cause changes in corporate loans with a two-quarter lag on average. Asymmetries between the credit and business cycles were found for Estonia. That is, it takes approximately five months from the beginning of an economic slowdown before corporate loans move into a contraction regime. However, it takes approximately eight months for corporate loans to recover their expansionary growth rate. Changes in household loans seemed to precede changes in economic activity by approximately one quarter.
-
No. 2004-1
(Download at EconPapers)
(published)
- Tairi Room
- Search Intensity and Wage Differences
Differences in job search behaviour have long been recognized in theoretical literature as a potential source of wage differentials. The aim of the current paper is to estimate whether there exists a systematic difference in search activity between genders and whether this can explain a part of the gender wage gap. These hypotheses are tested using micro-level data for the years 1998-2000 from the Estonian Labour Force Survey. The empirical model yields a result that unemployed men search more actively for new jobs than women. Controlling for the difference in search intensity significantly reduces the residual gender wage differential.
-
No. 2004-04
(Download at EconPapers)
(published)
- Rasmus Kattai and John Lewis
- Hooverism, hyperstabilisation or halfway-house? describing fiscal policy in Estonia 1996-2003
This paper develops a simple framework for describing fiscal policy where policymakers attempt to minimise deviations in output and budget balance from target values. Optimal policy is given by minimising a quadratic loss function subject to a linear structure of the economy. This policy can be viewed as weighted average of two polar cases - the case where the budget deficit adjusts to eliminate any deviations from potential output (hyperstabilisation), and the case where taxes and spending are determined exclusively by some budgetary goal (hooverism). We find some evidence of stabilisation for Poland, Latvia and Estonia. There is no evidence for the Czech Republic, Lithuania, Slovakia and Slovenia, suggesting that fiscal policy was being used for other objectives. The best fit is for Estonia, suggesting that a strict fiscal policy environment may not be incompatible with stabilising fiscal policy.
- JEL-Codes: E61; E62
- Keywords: Fiscal Policy, Fiscal Policy Rules, New EU Member States
-
No. 2003-9
(Download at EconPapers)
(published)
- Reimo Juks
- The relationship between REER and trade flows in the context of the equilibrium exchange rate
The paper focuses on the time-series analysis of the traditional trade equations. The results from the cointegration, ARDL and Granger causality analyses of trade elasticities cast some doubt on the usefulness of the internal-external balance approach to the equilibrium exchange rate. The long-run impact of the REER on trade flows turned out to be statistically insignificant, being independent of method and specification of the model employed. The latter implies a secondary role for the REER in achieving a sustainable position of external balance.
-
No. 2003-8
(Download at EconPapers)
(published)
- Marit Hinnosaar and Tairi Room
- The impact of minimum wage on the labour market in Estonia: an empirical analysis
In Estonia, as in several other EU acceding countries, minimum wage has been on an upward trend and in the coming years it will expectedly be raised faster than the average wage. Despite its rapid increase, the impact of the minimum wage on Estonian labour market has not been analysed. The current paper aims to fill this gap. We estimate the effect of the minimum wage on employment and wages in Estonia during the period of 1995-2000, using micro-data from Estonian Labour Force Surveys. The estimation results indicate that a minimum wage increase leads to employment reduction for the group of workers who are directly affected by this change, ie those whose wages have to be raised as a result. Additional negative effect of raising the minimum wage is that the rate of compliance with this regulation diminishes as a result, thereby enlarging the share of workers whose salaries remain below the legally set minimum.
-
No. 2003-4
(Download at EconPapers)
(published)
- Balzs gert
- Nominal and real convergence in Estonia: the Balassa-Samuelson (Dis)connection
The objective of the paper is to analyse the nominal and real convergence process in Estonia drawing on the Balassa-Samuelson (B-S) framework. A 15-sectoral breakdown for GDP and a 5-digit level CPI data disaggregation with over 260 items is used for the period 1993:Q1 to 2002:Q1 to show that the productivity differential is related to the GDP-deflator relative price of non-tradable goods in the long run. Furthermore, the role of regulated prices in the CPI basket is also investigated - we show that excluding regulated prices makes it possible to detect a robust relationship between productivity and the relative price of market services in CPI. The B-S effect could have possibly contributed to CPI by a yearly average of 2-3% over the sample period, and more specifically 1-4% at the beginning of the period and 0.5-1% in 2000 and 2001. The potential long-run impact of the B-S effect in Estonia is estimated to amount to 1-2%. Analysis of the influence of the B-S effect on the inflation differential and the real appreciation of the exchange rate against Finland, Sweden, Germany and the UK, shows that, whereas the inflation differential attributable to the B-S effect seems to have been higher in the early 1990s, it better explains the real appreciation occurring in recent years.
- Keywords: convergence, transition, Balassa-Samuelson effect, productivity, relative prices, tradable goods, regulated prices, real exchange rate
-
No. 2003-11
(Download at EconPapers)
(published)
- Rasmus Kattai, Alvar Kangur and Martti Randveer
- Automatic fiscal stabilisers in Estonia: the impact of economic fluctatios on general government budget balance
The paper discusses the functioning of automatic fiscal stabilisers in Estonia. The aim of the research is to evaluate government budget sensitivity to economic fluctuations and thereby assess the importance of automatic fiscal stabilisers in Estonia. Specifically we are interested in whether the functioning of automatic fiscal stabilisers might under certain circumstances create difficulties for the fulfilment of the Maastricht deficit criterion according to which public deficit is not allowed to exceed the limit of 3% of GDP.
The results of our research show that the role of automatic fiscal stabilisers is modest in Estonia. Budgetary sensitivity was approximately 0.35 in the period 1996-2001 - an increase in output gap by 1 percentage point causes a change in the budget balance by 0.35% of GDP. According to that maximum value, the budget's reaction was only 1.3% of GDP (while the output gap was -3.9%). A positive implication of this is that Estonia has good chances of holding the budget balance within the requested ceilings. If the output gap reaches -5%, structural deficit may still be 1% of GDP without the actual balance exceeding the 3% deficit boundary.
- JEL-Codes: E32; H2; H5; H6; H87
- Keywords: automatic fiscal stabilisers, structural budget balance, economic cycle, fiscal policy
-
No. 2003-10
(Download at EconPapers)
(published)
- Aurelijus Dabuinskas
- Exchange rate pass-through to Estonian prices
The objective of the paper is to further our understanding of the relationship between changes in the nominal exchange rate and prices in a small open economy. The paper uses data from 1995 Q1-2003 Q1 for Estonia to investigate the exchange rate pass-through to import, producer and consumer prices, both total and disaggregated. Although the currency board arrangement eliminates exchange rate fluctuations from a very significant share of the Estonian effective currency basket, the remaining variation in the nominal exchange rate can be regarded as exogenous (determined by the anchor currency), a useful feature when estimating the pass-through. In the case of import unit values, the pass-through tends to be statistically significant for textiles and commodity-type goods, such as petroleum, non-metal mineral products and basic metals. In the case of producer prices, the long-run pass-through is evident in textiles and chemical products. Point estimates of the long-run pass-through to aggregate import and producer prices fall between 40 and 50%, though the precision of these estimates is low. In contrast, no significant exchange rate pass-through is estimated to consumer prices, measured by total CPI or its tradable component.
-
No. 2003-1
(Download at EconPapers)
(published)
- Marit Hinnosaar
- Reservation wages in Estonia
This paper analyses the factors determining reservation wages in Estonia, and estimates the influence of the reservation wage on unemployment duration. According to estimations there is no statistically significant effect of unemployment benefit and social assistance on the reservation wage in Estonia. While evidence was found, that the higher the reservation wage, the lower the probability of finding a job, if all other things are equal. It was also found that the eligibility of unemployment benefit or social assistance increases the duration of the unemployment period, which indicates the lower offer arrival rate in the case of unemployed receiving assistance, which might be caused by a lower search intensity.
-
No. 2002-9
(Download at EconPapers)
(published)
- Virmantas Kvedaras and Olivier Basdevant
- Testing the efficiency of emerging markets: the case of the Baltic States
There is little evidence on the efficiency of the early stage of the capital market in transition countries, although market structure developments and the learning process could define the framework for efficient markets. The article tries to find out whether financial markets are efficient in the three Baltic States and if not, whether there are any signs of evolving to the efficient capital market. To answer these questions the analysis combines the methodology for testing the efficiency of capital market using the variance ratio robust to heteroscedasticity with the state-space representation, which enables us to use an efficient filtering technique - the Kalman filter - to get time varying autocorrelations. The official Estonian, Latvian, and Lithuanian stock exchange market indices TALSE, DJRSE, and LITIN comprising the most liquid parts of the stock market in a respective country are analysed. The main conclusion to be drawn from the analysis is that financial markets in the Baltic States are, with some turbulence, approaching weak form of efficiency.
-
No. 2002-4
(Download at EconPapers)
(published)
- Laura Ehrlich, Ulo Kaasik and Anu Randveer
- The impact of Scandinavian economies on Estonia via foreign trade and direct investments
The paper focuses on the benefits, challenges and risks of the Estonian economy stemming from close relations with its main foreign partners Finland and Sweden, through foreign direct investments and foreign trade. The paper gives a short overview of Finnish and Swedish economies to provide a background for the analysis of the characteristics of FDI and trade flows between Estonia and these countries. As Estonia is a very small and open economy main benefits and challenges are related to it. The authors find that FDI from Finland and Sweden increase the credibility of Estonian economy, but as foreign investment flows are subject to push factors they have the potential of destabilising capital flows, because these two countries make over 70% of FDI into Estonia. The authors also find that the dynamics of Estonian exports to Finland and Sweden (which make more than half of total exports) is generally determined by the demand factors of those countries.
-
No. 2002-2
(Download at EconPapers)
(published)
- Lucio Vinhas de Souza
- Integrated monetary and exchange rate frameworks: are there empirical differences?
The aim of the paper is to empirically estimate whether the different monetary and exchange rate frameworks observed in the accession countries of Central and Eastern Europe and the Baltic States do yield different outcomes in terms of level and variance of a set of nominal and real variables. The author follows and extends the methodology developed by Kuttner and Posen (2001), who perform a combined analysis of the individual effects of exchange rate regimes, central bank independence and announced targets in nominal variables for a large set of developed and developing countries. They also estimate that a set-up combining a free float, an independent currency board and inflation targeting yields an outcome that mimics the price stabilisation advantages of a hard peg without its drawbacks in terms of extreme volatility. This sample of countries, not covered by the Kuttner and Posen study, supports their conclusions for both nominal and real variables, testing for both the individual and combined effects of the frameworks and indicating that a flexible exchange rate regime, coupled with CBI and DIT, would be Pareto-improving when compared to harder regimes.
-
No. 2002-11
(Download at EconPapers)
(published)
- Andreas Freytag
- Estonian labour market and EMU membership - challenges and policy options
With the planned membership in EMU, Estonia will give up every option to pursue a discretionary monetary policy. This demands a very flexible labour market, returning to equilibrium by itself after a negative external shock. In general, the Estonian labour market regime allows for flexibility and labour force mobility. Nevertheless, there is a serious problem on the Estonian labour market, namely, a mismatch with respect to qualification. The paper discusses three potential remedies for this problem: 1) further development of the relatively underdeveloped social dialogue in Estonia, 2) an increase of the low extent of public labour market spending, and 3) a significant improvement of the education and training system. It turns out that concentration on education policy promises the highest yields. We conclude by referring to earmarked education vouchers. Such a system allows to fully employ the capacities of competition to generate the structure of qualifications necessary to increase the level of employment in Estonia.
-
No. 2002-1
(Download at EconPapers)
(published)
- Andreas Freytag
- Accession to EMU and exchange rate policies in Central Europe - decision under institutional constraints
Currently, five Central and Eastern European (CEE) countries are negotiating about the membership in the European Union: Czech Republic, Estonia, Hungary, Poland and Slovak Republic. There is a broad consensus that they will eventually become members of the European Monetary Union. This requires careful analysis of the appropriate exchange rate regime prior to the accession. The exchange rate arrangement of the EU applicants plays an important - but not exclusive - role in their policy-mix. The history of transition economies as well as of other emerging markets illustrates that exchange rate policies as such are not a distinctive factor for the success and failure of monetary policy with respect to price stability. In this paper it is argued that this outcome has not emerged by chance. There is no naturally superior exchange rate regime that can be applied to all advanced countries in transition aiming at stability. By way of contrast, an exchange rate arrangement is part of the monetary regime, which itself is a component of the economic order. The latter consists of both politically chosen and spontaneously evolved institutions. This leads to the hypothesis that the choice of an exchange rate arrangement in CEE is constrained by this institutional setting. The theoretical considerations as well as empirical evidence indeed suggest that for guaranteeing stability, beside the legal monetary commitment (part of which being the exchange rate regime) the institutional framework in the country is decisive. If the latter matches the commitment, the credibility of a monetary regime is relatively high, obviously encouraging monetary stability. Therefore, the institutional setting in each country should be analysed extensively before an exchange rate arrangement is chosen.
-
No. 2002-07
(Download at EconPapers)
- Marit Hinnosaar
- Unemployment and Labour Mobility in Estonia: Analysis Using Duration Models
The current paper analyses unemployment and labour movements between labour market statuses in the period of January 1997 to July 2000 using data from the Estonian Labour Force Surveys. The paper is motivated by the hypothesis that in the beginning of transition in Estonia high labour mobility and low unemployment rate seemed to be related. The analysis reveals that in the end of the 1990s labour mobility has decreased substantially in Estonia compared to 1994. The results from the paper indicate that unemployment rate and labour mobility measure have inverse relationship, both in aggregate and disaggregate level. The most mobile groups in Estonian labour market are Estonians, people living in the area of capital Tallinn and people with higher education. Young people also tend to move a lot from job to job. High mobility in case of young workers is accompanied by high number of unemployment incidents, which is captured by the aggregate unemployment rate time series.
-
No. 2002-06
(Download at EconPapers)
(published)
- Olivier Basdevant and Ulo Kaasik
- The Core of a Macro-economic Model for Estonia
This article presents a macro-econometric model for Estonia currently developed at the Bank of Estonia. It is based on a basic macro-economic framework that integrates both supply and demand side components. With this model we analyse the policy that should be implemented to maintain sustainable growth. The main emphasis is on the need to continue tough fiscal policy in order to maintain public deficit, as well as to avoid inflationary pressures and keep Estonia attractive to foreign investors.
-
No. 2002-05
(Download at EconPapers)
(published)
- Urmas Sepp and Martti Randveer
- Aspects of the Sustainability of Estonian Currency Board Arrangement
The main aim of the paper is to examine different aspects of the sustainability of Estonian CBA. For this purpose the paper gives an overview of CBA in general, describes the rationale for the choice of the CBA in Estonia and uses model simulations to assess its sustainability. It also analyses whether the preconditions for the successful performance of the CBA are in place in Estonia and discusses the compatibility of Estonian CBA to the EMU and ERM 2. The analysis in the paper shows that CBA is a suitable exchange rate regime for Estonia. It is argued that the preconditions for a well-functioning CBA - resilient financial sector, flexible wage and employment system and prudent fiscal policy - are in place. The sustainability of the CBA is also supported by model simulations, which show that shocks hitting Estonian economy do not cause convergence of the Estonian economy from the long-run path. Based on the above-mentioned results, the paper concludes that the currency board arrangement is the best exchange rate regime for Estonia before the full participation in the third stage of the EMU.
-
No. 2001-5
(Download at EconPapers)
(published)
- Rasmus Pikkani
- Monetary transmission mechanism in Estonia - empirical model
Estonia has conducted effectively monetary policy according to currency board arrangement for nine years already. For this Estonia has traded off its freedom in active monetary policy operations for nominal anchoring economy through exchange rate. In this context Estonian own monetary policy actions could hardly make any difference and Estonian monetary conditions are heavily relying on decisions made by the issuer of anchor currency. At the same time, there are number of factors having influence on the degree of dependence on foreign monetary factors, most important of which is the openness of the economy to all balance of payments flows and the strength of the domestic banking sector. A mix of all possible factors and decision-making rules in the economy specifies directly the speed and the strength of transmission of foreign monetary signal into domestic economy.
The aim of the current paper is to study transmission of ECB monetary policy decisions into Estonian economy. Additionally, absorption of unanticipated foreign and domestic monetary shocks are analysed. For this, rather small macroeconometric model with 11 behavioural equations is specified and estimated. Special emphasis is given on the formation of domestic interest rates and on the intermediation of domestic and foreign funds by domestic banking sector over shock periods. As a result, it is found that the transmission of ECB monetary policy actions over European inter-bank money market into Estonian economy is relatively fast. This is probably mostly due to high openness of the economy and to high price and wage flexibility in Estonia.
-
No. 2001-4
(Download at EconPapers)
- Raoul Ltteme
- Monetary transmission mechanism in Estonia - some theorethical considerations and stylized aspects
The monetary system in Estonia is based on the currency board arrangement. The strong commitments and rule-based features of currency board imply that there is no active monetary policy in Estonia - all necessarily monetary adjustments are left to the market forces. Under fixed exchange rate and free capital mobility Estonian monetary conditions are therefore closely linked with monetary policy in Europe - in addition to the changes in Estonian risk-premium, interest rate developments in Europe can directly influence Estonian interest rates. Those monetary signals transmit widely into Estonian financial sector and ultimately into Estonian real sector through various channels. Some theoretical and intuitive aspects that can affect this process in Estonia have gained special attention in this paper.
-
No. 2001-2
(Download at EconPapers)
- Marit Hinnosaar
- Potential output estimates for Central and East European countries using production function method
In the paper potential output of four Central and East European countries is estimated using the Cobb-Douglas production function. Estonian production function uses data of employment, sectoral restructuring, estimated capital stock and foreign direct investments. Capital stock and level of technology are estimated for the Central and East European countries using the same form of production function and parameter estimates of Estonian economy. Potential output is calculated using the long-term unemployment to approximate potential labour input in the production. According to the estimates potential output is higher than actual in all the countries during most of the period, except in the fast economic growth periods (in the Czech Republic in 1995-1996, Estonia in 1997-1998 and Latvia in 1997, respectively).
-
No. 2001-1
(Download at EconPapers)
- Andres Vesilind and Laura Ehrlich
- Determinants of Estonian export of goods: an econometric analysis and comparison with Latvia and Lithuania
The goal of this paper was to analyse empirically the importance of different determinants of Estonian export and compare the results with Latvia and Lithuania. For a theoretical model, the imperfect substitutes model was chosen. For empirical estimation Estonian nominal export was disaggregated by commodity groups, by customs procedures and by groups of destination countries. Besides that an equation of real aggregate goods' export and models of Latvian and Lithuanian export by commodity groups were estimated.
According to estimated models Estonian export is mainly determined by manufacturing output in Finland and Sweden and real economic growth in other EU countries. Also real consumption in neighbouring countries is important for Estonian export, but here the countries of influence change - the influence of Russia declines as the influence of Western countries rises. Prices and exchange rates have smaller effect to Estonian exports.
The comparison of the results of Estonian export modelling to those of Latvia and Lithuania shows that the main determinants of export in three countries are different. While Estonian export is mainly influenced by Nordic economies, Latvian and Lithuanian export is mainly influenced by Germany and the UK. The influence of Russia has declined in all three countries, remaining the highest in the case of Lithuania.
-
No. 2001-03
(Download at EconPapers)
(published)
- Andres Vesilind, Ingrid Toming and Raoul Ltteme
- Determinants of Estonian Sovereign Credit Rating
The paper focuses on sovereign credit ratings assigned to Estonia and analyses their possible determinants. The first chapter gives an overview of different rating agencies and the methodology they use in rating process. Besides that the interpretation, comparability and explanatory power of different ratings are analysed. The chapter concludes with the description of Estonian rating history.
The second chapter analyses the possible determinants of Estonian rating. Firstly, the possible problems in analysing the determinants are discussed. Secondly, the factors that have been seen as important determinants of ratings in theoretical literature or previous empirical researches are presented.
The third chapter analyses empirically the determinants of Estonian credit rating. For this purpose, Estonia is analysed in the context of three country groups: former socialist countries, developed European countries and countries having similar ratings. Also the factors that different rating agencies have pointed out in their reports about Estonia are compared with the empirical results. The chapter concludes with the comparison of the results of the analysis and SWOT analysis.
The results of the paper show that the most critical factors for Estonia that can constrain possible rating upgrade in the future are low nominal level of per capita GDP, high unemployment rate and high CA deficit. At the same time it should be looked after that other important indicators that have a strong relation with rating (such as inflation, fiscal balance, foreign debt level and speed of transition and EU accession) are kept under control.
-
No. 2000-4
(Download at EconPapers)
- Rasmus Pikkani
- The monetary sector under a currency board arrangement : specification and estimation of a model with Estonian data
Modelling work on Estonian data indicates that external financing of the private sector has strong impact on domestic demand, which implies that valuable insights may be gained in this case from understanding the behavioural relationships in the monetary sector. The current paper provides a theoretical analysis of the monetary sector under a currency board regime and applies specification tests to Estonian data. As a final product, empirical equations for average lending rate, loans provided to the private sector and money demand are estimated. While estimations herein use monthly data, quarterly modifications of the model will be inserted into Eesti Pank's quarterly macromodel in the future.
-
No. 2000-1
(Download at EconPapers)
(published)
- Urmas Sepp, Andres Vesilind and Ulo Kaasik
- Estonian Inflation Model
The objective of model-building was an inflation model suitable for prognosis as well as for simulation. The model serves two purposes. First of all, it is a tool for analysing inflation. Secondly, it is part of the model of Estonian economy, which completes the adjustment loop of the macromodel. The theoretical background of the inflation model derives from four basic features of Estonian economy. Namely, Estonia is: a small and open economy, a transitional economy, economy under currency board arrangement and a market economy. When estimating the model, inflation was decomposed into a) underlying inflation which is a long-run process and b) inflation deviations from the equilibrium which are caused by the short-run impact of inflation factors. The underlying inflation, which reflects the convergence, is determined as a trend. The latter was specified as a time function, ARMA process, moving average and HP filter, whereas the best result was obtained with time function. According to modelling output the short run dynamics of the inflation are determined by three main factors - demand pressure reflected by the GDP gap, exchange rate of the US dollar (which is proxy for foreign prices), and administrative action for correcting regulated prices.
The adequacy of the model has been tested on the basis of ex post and ex ante prognosis. The model provided acceptable results in the simulation of endogenous and exogenous shocks
-
No. 1999-1
(Download at EconPapers)
(published)
- Urmas Sepp
- Factors of trade-deficit convergence in Estonia
-
|
|
|