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Working Paper Series in Economics
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No. 2001-5
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(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.
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No. 2001-4
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- Raoul Lättemäe
- 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.
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No. 2001-2
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- 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).
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No. 2001-1
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- 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.
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No. 2001-03
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(published)
- Andres Vesilind, Ingrid Toming and Raoul Lättemäe
- 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.
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