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Working Paper Series in Economics
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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
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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
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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
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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
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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
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No. wp2013-5
(Download at EconPapers)
- Guido Baldi and Karsten Staehr
- The European debt crisis
and fiscal reaction functions
in Europe 2000–2012
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 2001–2008 and for the
post-crisis period 2009–2012. 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
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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 2007–2011, 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
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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 ďż˝ 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
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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
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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
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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
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No. wp2012-7
(Download at EconPapers)
- Aurelijus Dabušinskas, 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
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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
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