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Working Paper Series in Economics
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No. 2005-6
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(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
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No. 2005-4
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(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 1995–2001. 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
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No. 2005-3
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(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
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No. 2005-2
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(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
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No. 2005-13
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(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
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No. 2005-12
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(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
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No. 2005-11
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(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
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No. 2005-10
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(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
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No. 2005-09
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(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
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No. 2005-08
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(published)
- Kadri Männasoo 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
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No. 2005-07
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(published)
- Aurelijus Dabušinskas
- 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
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No. 2005-05
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(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
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