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Working Paper Series in Economics
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No. 2007-11
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- 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
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No. 2007-10
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- Aaro Hazak and Kadri Männasoo
- 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
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No. 2007-09
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- 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
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No. 2007-07
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- Aurelijus Dabušinskas 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 Galí and Gertler (1999) and Galí
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,
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No. 2007-06
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- 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
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No. 2007-04
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- Kadri Männasoo
- 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
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No. 2007-03
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- 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
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No. 2007-02
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- 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
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No. 2007-01
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- 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
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