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Working Paper Series in Economics
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No. wp2016-9
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- 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
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No. wp2016-8
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- 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
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No. wp2016-7
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- 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
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No. wp2016-6
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- 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
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No. wp2016-5
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- 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
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No. wp2016-4
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- 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
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No. wp2016-3
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- 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
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No. wp2016-2
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- 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
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No. wp2016-1
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- 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
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No. wp2015-8
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- 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
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