This paper analyses the impact of exchange rate regimes on the real sector. While most studies in this field have so far concentrated on aggregate variables, we pursue a sectoral approach distinguishing between the tradable and nontradable sectors. Firstly, we present a survey of the relevant theoretical and empirical literature. This demonstrates that evaluations of exchange rate regimes and their impact on the real economy are largely dependant on specific assumptions concerning, in particular, the parameters of a utility function, the nature of the price adjustment process and the characteristics of analysed shocks. Secondly, we conduct an empirical analysis of the behaviour of the tradable and nontradable sectors under different exchange rate regimes for seven Central and Eastern European countries. We find no firm evidence of a differential impact of given exchange rate regimes on the dynamics of output and prices in the two sectors. We proffer a conceptual and technical interpretation of this.
Authored by: Przemyslaw Kowalski, Wojciech Paczynski, Łukasz Rawdanowicz
Published in 2003
This paper employs a standard Tobin-Markowitz framework to analyse the determinants of capital flows into the CIS countries. Using data from 1996-2006, we find that the Russian financial crisis of 1998 has had a profound impact on capital flows into the CIS (both directly and indirectly). Firstly, it introduced a structural shift in the investors' behaviour by shifting the focus from the external factors to the internal ones, e.g. domestic interest and GDP growth rates. Secondly, it also drastically changed the impact of a number of explanatory variables on capital flows into the CIS. Political risk was found to be the second most important determinant of capital flows into the CIS. Additionally, we report some strong evidence of co-movement between portfolio flows into the CIS and CEEC, coupled with strong complementarity between global stock market activity and portfolio inflows into the CIS. Interestingly, external factors tend to be of a higher significance than internal factors for the largest members (Russia, Ukraine and Kazakhstan) of the CIS; whereas domestic variables tend to have a greater impact on the capital flows into the smaller CIS countries.
Authored by: Oleksandr Lozovyi
Published in 2007
The paper deals with the choice of the nominal euro conversion rates for the acceding countries upon their accession to EMU. The paper reviews theoretical models of equilibrium exchange rates as well as discusses their interpretation and the ensuing policy recommendations. Problems with empirical estimations of existing models are addressed. It is argued that despite several equilibrium exchange rate theories not all of them are useful for the real policy choice of the nominal conversion rate. This and the intrinsic uncertainty of equilibrium exchange rate estimates lead to the conclusion that the range of “optimal” euro conversion rates is quiet wideand other issues must be taken into account. In particular, a smooth transition to the euro conversion rate and minimisation of risks of potential shocks to the economy should be the keyconcern. Consequently, recommendations for the selection of nominal conversion rates are largely dependent on the current exchange rate regime.
Authored by: Łukasz Rawdanowicz
Published in 2003
In this paper we investigate the effects of EU enlargement on price convergence. The internal market is expected to boost integration and increase efficiency and welfare through a convergence of prices in product markets. Two principal drivers are crucial to explain price developments. On the one hand, higher competition exerts a downward pressure on prices because of lower mark ups. On the other hand, the catching up process of low income countries leads to a rise in the price levels and higher inflation over a transition period. Using comparative price levels for individual product categories price convergence can be established. However, the speed of convergence is rather slow, with half lives around 10 years. The enlargement has slightly stimulated the convergence process, and this impact is robust across different groups of countries. Moreover, the driving forces of convergence are explored. In line with theoretical predictions, the rise in competition exerts a downward pressure on prices, while catching up of low income countries leads to a rise in price levels.
Authored by: Christian Dreger, Konstantin Kholodilin, Kirsten Lommatzsch, Jirka Slacalek, Przemyslaw Wozniak
Published in 2007
This study seeks to determine the extent to which countries of the former Soviet Union are "infected" by the Dutch Disease. We take a detailed look at the functioning of the transmission mechanism of the Dutch Disease, i.e. the chains that run from commodity prices to real output in manufacturing. We complement this with two econometric exercises. First, we estimate nominal and real exchange rate models to see whether commodity prices are correlated with the exchange rate. Second, we run growth equations to analyse the possible effects of commodity prices and the dependency of economic growth on natural resources.
Authored by: Balazs Egert
Published in 2009
The report reviews key issues in energy trade and cooperation between the EU and CIS countries. It describes historical trends of oil and gas demand in the EU, other European and CIS countries and offers demand forecasts until 2030. Recent developments in oil and gas production and exports from Russia and Caspian countries are covered in detail leading to the discussion of the likely export potential of these regions. The key factors determining the production outlook, trade-offs and competition related to energy resources transportation choices are also discussed. The report also covers the interests and role of transit countries in relations between producer and consumer regions. The analytical section leads to policy recommendations that focus mainly on the EU.
Authored by: Sabit Bagirov, Leonid Grigoriev, Wojciech Paczynski, Vladimer Papava, Marcel Salikhov, Michael Tokmazishvili
Published in 2009
This paper examines the motives behind foreign direct investment (FDI) in a group of four CIS countries (Ukraine, Moldova, Georgia and Kyrgyzstan) based on a survey of 120 enterprises. The results indicate that non-oil multi-national enterprises (MNEs) are predominantly oriented at serving local markets. Most MNEs in the CIS operate as 'isolated players', maintaining strong links to their parent companies, while minimally cooperating with local CIS firms. The surveyed firms secure the majority of supplies from international sources. For this reason, the possibility for spillovers arising from cooperation with foreign-owned firms in the CIS is rather low at this time. The lack of efficiency-seeking investment poses further concern regarding the nature of FDI in the region. The most significant problems identified in the daily operations of the surveyed foreign firms are: the volatility of the political and economic environment, the ambiguity of the legal system and the high levels of corruption.
Authored by: Malgorzata Jakubiak
Published in 2008
This paper analyzes the direct and indirect income effects of international labor migration and remittances in selected CIS countries. The analysis is based on computable general equilibrium (CGE) models for Moldova, Ukraine, Georgia, Kyrgyzstan, and Russia. All net emigration countries would experience a sharp contraction of private consumption in the absence of remittances. In Russia, the main effect of immigration has been to hold down the real wage (as potential capital stock adjustments in response to immigration are not reflected in the authors comparative-static modeling framework). The paper concludes that because of the important contribution of migration and remittances to stabilizing and sustaining incomes in many CIS countries, enhanced opportunities for legal labor migration should figure prominently in any deepening of bilateral relations between CIS countries and the European Union under the European Neighborhood Policy.
Authored by: Aziz Atamanov, Toman Omar Mahmoud, Roman Mogilevsky, Kseniya Tereshchenko, Natalia Tourdyeva
Published in 2009
Ainura Uzagalieva
Vitaly Vavryschuk
An attempt is made to explore the basic implications of differences in productivity growth rates in countries within a monetary union and tailor them to the case of the EU new member countries running up to the EMU. By using the mathematical model of Harrod-Balassa-Samuelson effect and linking productivity and relative price dynamics with monetary policy, it is shown that: 1) productivity growth in faster-growing countries (FGC) leads to either inflation there, or union-wide exchange rate appreciation, or both in certain proportions, depending on the monetary policy stance taken by the union, but does not cause increase in inflation in slower-growing countries (SGC) by itself, unless the union’s monetary authorities take pro-inflationary policy; 2) because of presence of FGC, the SGC do not become less competitive in the world, and can benefit from increased export of their goods to FGC, provided their labour markets are flexible enough; 3) the real challenge for SGC posed by FGC is not inflation, but rather loss of jobs and export revenues, if their labour markets are not flexible enough to adjust under tight union-wide monetary policy aimed at keeping the union-wide overall price level unchanged, or the labour productivity increase in FGC is not met by adequate improvement in labour productivity in SGC. It should be noted, however, that this ‘adequate improvement’ is enough to constitute only a fraction of the productivity growth in FGC.
Authored by: Nikolai Zoubanov
Published in 2003
This paper employs a standard Tobin-Markowitz framework to analyse the determinants of capital flows into the CIS countries. Using data from 1996-2006, we find that the Russian financial crisis of 1998 has had a profound impact on capital flows into the CIS (both directly and indirectly). Firstly, it introduced a structural shift in the investors' behaviour by shifting the focus from the external factors to the internal ones, e.g. domestic interest and GDP growth rates. Secondly, it also drastically changed the impact of a number of explanatory variables on capital flows into the CIS. Political risk was found to be the second most important determinant of capital flows into the CIS. Additionally, we report some strong evidence of co-movement between portfolio flows into the CIS and CEEC, coupled with strong complementarity between global stock market activity and portfolio inflows into the CIS. Interestingly, external factors tend to be of a higher significance than internal factors for the largest members (Russia, Ukraine and Kazakhstan) of the CIS; whereas domestic variables tend to have a greater impact on the capital flows into the smaller CIS countries.
Authored by: Oleksandr Lozovyi
Published in 2007
The paper deals with the choice of the nominal euro conversion rates for the acceding countries upon their accession to EMU. The paper reviews theoretical models of equilibrium exchange rates as well as discusses their interpretation and the ensuing policy recommendations. Problems with empirical estimations of existing models are addressed. It is argued that despite several equilibrium exchange rate theories not all of them are useful for the real policy choice of the nominal conversion rate. This and the intrinsic uncertainty of equilibrium exchange rate estimates lead to the conclusion that the range of “optimal” euro conversion rates is quiet wideand other issues must be taken into account. In particular, a smooth transition to the euro conversion rate and minimisation of risks of potential shocks to the economy should be the keyconcern. Consequently, recommendations for the selection of nominal conversion rates are largely dependent on the current exchange rate regime.
Authored by: Łukasz Rawdanowicz
Published in 2003
In this paper we investigate the effects of EU enlargement on price convergence. The internal market is expected to boost integration and increase efficiency and welfare through a convergence of prices in product markets. Two principal drivers are crucial to explain price developments. On the one hand, higher competition exerts a downward pressure on prices because of lower mark ups. On the other hand, the catching up process of low income countries leads to a rise in the price levels and higher inflation over a transition period. Using comparative price levels for individual product categories price convergence can be established. However, the speed of convergence is rather slow, with half lives around 10 years. The enlargement has slightly stimulated the convergence process, and this impact is robust across different groups of countries. Moreover, the driving forces of convergence are explored. In line with theoretical predictions, the rise in competition exerts a downward pressure on prices, while catching up of low income countries leads to a rise in price levels.
Authored by: Christian Dreger, Konstantin Kholodilin, Kirsten Lommatzsch, Jirka Slacalek, Przemyslaw Wozniak
Published in 2007
This study seeks to determine the extent to which countries of the former Soviet Union are "infected" by the Dutch Disease. We take a detailed look at the functioning of the transmission mechanism of the Dutch Disease, i.e. the chains that run from commodity prices to real output in manufacturing. We complement this with two econometric exercises. First, we estimate nominal and real exchange rate models to see whether commodity prices are correlated with the exchange rate. Second, we run growth equations to analyse the possible effects of commodity prices and the dependency of economic growth on natural resources.
Authored by: Balazs Egert
Published in 2009
The report reviews key issues in energy trade and cooperation between the EU and CIS countries. It describes historical trends of oil and gas demand in the EU, other European and CIS countries and offers demand forecasts until 2030. Recent developments in oil and gas production and exports from Russia and Caspian countries are covered in detail leading to the discussion of the likely export potential of these regions. The key factors determining the production outlook, trade-offs and competition related to energy resources transportation choices are also discussed. The report also covers the interests and role of transit countries in relations between producer and consumer regions. The analytical section leads to policy recommendations that focus mainly on the EU.
Authored by: Sabit Bagirov, Leonid Grigoriev, Wojciech Paczynski, Vladimer Papava, Marcel Salikhov, Michael Tokmazishvili
Published in 2009
This paper examines the motives behind foreign direct investment (FDI) in a group of four CIS countries (Ukraine, Moldova, Georgia and Kyrgyzstan) based on a survey of 120 enterprises. The results indicate that non-oil multi-national enterprises (MNEs) are predominantly oriented at serving local markets. Most MNEs in the CIS operate as 'isolated players', maintaining strong links to their parent companies, while minimally cooperating with local CIS firms. The surveyed firms secure the majority of supplies from international sources. For this reason, the possibility for spillovers arising from cooperation with foreign-owned firms in the CIS is rather low at this time. The lack of efficiency-seeking investment poses further concern regarding the nature of FDI in the region. The most significant problems identified in the daily operations of the surveyed foreign firms are: the volatility of the political and economic environment, the ambiguity of the legal system and the high levels of corruption.
Authored by: Malgorzata Jakubiak
Published in 2008
This paper analyzes the direct and indirect income effects of international labor migration and remittances in selected CIS countries. The analysis is based on computable general equilibrium (CGE) models for Moldova, Ukraine, Georgia, Kyrgyzstan, and Russia. All net emigration countries would experience a sharp contraction of private consumption in the absence of remittances. In Russia, the main effect of immigration has been to hold down the real wage (as potential capital stock adjustments in response to immigration are not reflected in the authors comparative-static modeling framework). The paper concludes that because of the important contribution of migration and remittances to stabilizing and sustaining incomes in many CIS countries, enhanced opportunities for legal labor migration should figure prominently in any deepening of bilateral relations between CIS countries and the European Union under the European Neighborhood Policy.
Authored by: Aziz Atamanov, Toman Omar Mahmoud, Roman Mogilevsky, Kseniya Tereshchenko, Natalia Tourdyeva
Published in 2009
Ainura Uzagalieva
Vitaly Vavryschuk
An attempt is made to explore the basic implications of differences in productivity growth rates in countries within a monetary union and tailor them to the case of the EU new member countries running up to the EMU. By using the mathematical model of Harrod-Balassa-Samuelson effect and linking productivity and relative price dynamics with monetary policy, it is shown that: 1) productivity growth in faster-growing countries (FGC) leads to either inflation there, or union-wide exchange rate appreciation, or both in certain proportions, depending on the monetary policy stance taken by the union, but does not cause increase in inflation in slower-growing countries (SGC) by itself, unless the union’s monetary authorities take pro-inflationary policy; 2) because of presence of FGC, the SGC do not become less competitive in the world, and can benefit from increased export of their goods to FGC, provided their labour markets are flexible enough; 3) the real challenge for SGC posed by FGC is not inflation, but rather loss of jobs and export revenues, if their labour markets are not flexible enough to adjust under tight union-wide monetary policy aimed at keeping the union-wide overall price level unchanged, or the labour productivity increase in FGC is not met by adequate improvement in labour productivity in SGC. It should be noted, however, that this ‘adequate improvement’ is enough to constitute only a fraction of the productivity growth in FGC.
Authored by: Nikolai Zoubanov
Published in 2003
This paper seeks the main factors behind inflation in Russia over the period 1996–2001. It presents a succinct description of Russian monetary policy and inflation developments. The econometric analysis establishes a long-run relationship between demand for the real money balances on the one side and the real income and short-term interest rate on the other side. It also presents several specifications of modeling shortrun dynamics of inflation. An account is made for the change in the exchange rate regime after the financial crisis of August 1998. It finds that apart from strong inertia, money expansion and exchange rate depreciation played a role in fueling the CPI. However, there were significant shifts in the underlying trends driving inflation during the studied period.
Until 1999 fiscal policy posed the biggest obstacle to the disinflation process in Russia. In 2000–2001 the main responsibility for sustained inflation pressure can be attributed to monetary policy trying to target money supply and exchange rate at the same time. The way out from this policy trap leads through the adoption of one of the so-called 'corner' solutions, i.e. either a permanently fixed exchange rate, or independent monetary policy under a free float regime. Taking into consideration a historically limited credibility of macroeconomic policy and the high level of dollarization, the first variant seems to be a better solution for Russia. However, its implementation would require the accompanying fiscal, banking and other structural reforms creating a healthy policy-mix and flexible microeconomic environment.
Authored by: Marek Dabrowski, Wojciech Paczynski, Łukasz Rawdanowicz
Published in 2002
The paper contributes to the recent empirical literature on real exchange rates in CEECs. Instead of estimating a complete model, the PPP and relative price models (two main components of the real exchange rate) are investigated separately. All empirical tests are conducted in the heterogonous dynamic panel framework. The unbalanced panel includes generally nine CEECs (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia) over 1993-2002.
Authored by: Łukasz Rawdanowicz
Published in 2004
This paper estimates responses to monetary shocks for several of the current members of the EMU (in the pre-EMU sample) and for the Central and East European (CEE) countries, along with the mean response in each of the groups. The problem of the short sample, especially acute in the case of the CEE, is mitigated by using a Bayesian estimation which combines information across countries. The estimated responses are similar across regions, but there is some evidence of more lagged and deeper price responses in the CEE economies. If this results from structural differences, premature entering the EMU would cause problems, but if from credibility issues, entering the EMU would be desirable. Also, with longer response lags, conducting a stabilizing monetary policy should be difficult in the CEE currently, and giving it up might not be a big loss after all.
Authored by: Marek Jarocinski
Published in 2004
The paper discusses the issue of labor force mobility in a broad sense, and analyses how changes in social security policy and the structure of the social safety net (SSN) affects different aspects of labor force mobility. The text is structured as follows: Introduction, then follows Chapter 2, which provides an overview of the labor market and social safety net developments in Russian and Ukraine over the last decade, as well as discusses common features of these countries. The Chapter 3 establishes theoretical models for different aspects of labor force mobility, discusses the availability of data on Russia and Ukraine to test these models, and provides a statistical analysis of the data. The Chapter 4 discusses results of the statistical analysis. The final chapter discusses policy conclusions that can be derived from comparison of the effect of the SSN on labor mobility in these two countries, and extends them to all countries in transition.
Authored by: Marek Gora, Oleksander Rohozynsky
Published in 2009
Labor migration from Eastern Europe and the member countries of Commonwealth of Independent States (CIS) to the Western countries became an important socio-economic issue. Since political systems and the nature of border management in these regions, migrations turned out to be a very complex and unpredictable issue. The purpose of this study is to analyze the region specific actors, practices and policies of migration in the Eastern countries, the possible scenarios and demographic consequences of the future migration flows. In order to address this issue properly, some of the complexities of labor migration phenomenon in the region are uncovered.
Authored by: Xavier Chojnicki, Ainura Uzagalieva
Published in 2008
The paper discusses possible directions and magnitudes of the relationship between the social security driven tax wedge, employment and shadow employment in Russia and Ukraine. The first section presents a summary of the economic and institutional background for development of the current size and structure of the socially driven tax wedge in both countries. The second section presents some theoretical considerations on the relationship between the social protection system, tax wedge, non-employment and finally, shadow employment. The third section contains an attempt to econometrically estimate the magnitude of the possible relationship between the tax wedge and total employment rates in both countries. In the fourth section, the authors try to discover the mechanism of influence of the last reform of the Ukrainian payroll tax system on the structure and size of shadow employment in the country. The last analytical section closes the circle leading the reader back from shadow employment to wages and finally to the issue of access to social security institutions. The last section concludes.
Authored by: Marek Gora, Oleksandr Rohozynsky, Irina Sinitsina, Mateusz Walewski
Published in 2009
This paper aims to devise a monetary policy instrument rule that is suitable for open economies undergoing monetary convergence to a common currency area. The open-economy convergence-consistent Taylor rule is forward-looking, consistent with monetary framework based on inflation targeting, containing input variables that are relative to the corresponding variables in the common currency area. The policy rule is tested empirically for three inflation targeting countries converging to the euro, i.e. the Czech Republic, Poland and Hungary. Stability tests of the input variables affirm prudent inclusion of these variables in the suggested policy rule. Empirical tests of the proposed instrument rule point to systemic differences in monetary policies among these euro-candidates. The Czech inflation targeting is forwardlooking relying on a sensible balance between inflation and output growth objectives. Poland's policy focuses on backward-looking inflation, while the Hungarian policy on exchange rate stability. Forecasts of policy instruments based on the prescribed rule are more accurate and reliable for the Czech Republic and Hungary, but less for Poland.
Authored by: Lucjan T. Orlowski
Published in 2008
This paper provides the results of analyses of key problems related to pension systems and their reforms in Russia and Ukraine. The pension systems and their reforms in both countries are compared. They are also compared with the general picture observed in the OECD or selected countries belonging to that area. The analysis focuses on long-term trends rather than short-term shocks. The recent economic crisis is not covered since the analysis was mostly completed by 2008.
Authored by: Marek Gora, Oleksandr Rohozynsky, Oksana Sinyavskaya
Published in 2010
The paper focuses on the social safety nets in Russian Federation and Ukraine in the view of changes on the labour market since the beginning of economic transition. The authors showed that many past phenomena (e.g. restructuring of the economy, wage and pension arrears, new groups at-risk-of-poverty, demographic transition) caused a need to change an old type social safety net (SSN) into the new one, better adapted to emerging more liberal economy problems.
Additionally, the authors analysed some gender specific issues related to social security that are caused mainly by inequalities in the labour market. Differences of earnings between men and women in Russia caused by sector segregation account for seem to be more important than the gap between gender earnings attributed to the position. In Ukraine the main contributors to gross gender differential of log earnings (that equals to 32%) explained by our model are sector segregation and occupation.
The authors also pointed out to future policy challenges in the area of social security systems in both countries. The retirement reforms introduced recently are a step in the right direction, although their impact will not be felt for a number of years. Other reforms, with more immediate results, are necessary. Social safety nets should be made more efficient and social benefits should be better targeted.
Authored by: Marek Gora, Grzegorz Kula, Oleksandr Rohozynsky, Magdalena Rokicka, Anna Ruzik-Sierdzinska
Published in 2009
This paper presents forecasts for the Financial Stress Index (FSI) and the Economic Sensitivity Index (ESI) for the period 2015-2015 for six countries in the region, namely the Czech Republic, Estonia, Hungary, Latvia, Lithuania and Poland. It is a continuation of the endeavor to construct synthetic indices measuring financial stress and economic sensitivity for twelve Central and East European countries using the Principal Component Analysis. In order to obtain forecasts of the FSI, we estimated Vector Autoregression (VAR) models on monthly data for the period 2001-2012 separately for all the countries. Using quarterly historical values of ESI and FSI, we estimated Dynamic Panel Data Model for the complete sample of countries. Parameters of the model were later used for forecasting the ESI. Obtained results suggest that the FSI will start to rise in 2014 in the Czech Republic, Lithuania, and Estonia. For Latvia and Hungary, we observed a conversion in the trend, i.e. at the beginning of 2015, when the index should start to fall. According to our forecasts, the ESI will be rising in the next two years, except for Hungary, where we predict a continuous decrease in economic sensitivity.
Authored by: Maciej Krzak and Grzegorz Poniatowski
Published in 2014
This paper is focused on the development of a proper macroeconomic strategy in the process of Poland's accession to the European Monetary Union. It is argued that due to legal and political considerations Poland may not opt out from EMU participation. The country will however command net gains from participation in the eurozone, mainly due to reduced macroeconomic and microeconomic uncertainty. In order to achieve even higher gains it is necessary to reduce price and wage rigidities, eliminate constraints on free movement of labor, further promote trade links with EU and its diversification. Loss of monetary and exchange rate instruments will require responsive but generally conservative fiscal policy. Particularly, as Poland might experience major economic upturn at the outset in the EU membership, the country should achieve positive budget balance by this time. It will allow for fiscal expansion in case of future negative asymmetric shock or recessions. Fiscal policy should be therefore assigned to improve saving-investment balance and consequently current account, so that direct inflation targeting is well placed to achieve fulfillment of Maastricht price stability criterion. Real exchange rate is not an independent instrument to target current account, as real appreciation of domestic currency is unavoidable due to rapid productivity gains in Poland. Finally, the accession to EMU should follow promptly the accession to EU. Unilateral introduction of Euro is too risky for banking and real sectors. Slower process of joining EMU would hamper credibility of macroeconomic adjustment commitment.
Authored by: Arthur Radziwill
Published in 2001
This paper focuses on roots of strain in the European Monetary Union (EMU). It argues that there is need for a thorough reform of the governance structure of the Union in conjunction with radical changes in the regulation and supervision of financial markets. Financial intermediation has gone astray in recent decades and entailed a big bubble in the industrialized world. Waves of financial deregulation have enhanced systemic risks, via speculative behavior and growing inter-connectedness. Moreover, the EMU was sub-optimal from its debut and competitiveness gaps did not diminish against the backdrop of its inadequate policy and institutional design. The euro zone crisis is not related to fiscal negligence only; over-borrowing by the private sector and poor lending by banks, as well as a one-sided monetary policy, also explain this debacle. The EMU needs to complement its common monetary policy with solid fiscal/budget underpinnings. Fiscal rules and sanctions are necessary, but not sufficient. A common treasury (a federal budget) is needed in order to help the EMU absorb shocks and forestall confidence crises. A joint system of regulation and supervision of financial markets should operate. Emergency measures have to be comprehensive and acknowledge the necessity of a lender of last resort; they have to combat vicious circles. Structural reforms and EMU level policies are needed to enhance competitiveness in various countries and foster convergence. The EU has to work closely with the US and other G20 members in order to achieve a less unstable global financial system.
Authored by: Daniel Daianu
Published in 2012
Demographic change (driven by the second demographic transition) led to an uncontrolled increase in scale of various social expenditure in the OECD area, especially in continental Europe. Costs of social transfers created fiscal pressure leading to the necessity of tax increases all over Europe, including the New Member States. Employment consequences of emerging higher tax wedge has become the topic of large body of research. However, surprisingly little evidence is known on distribution of that problem across workers. Is the effect of high tax wedge equally spread or certain groups of workers suffer more than others? More specifically, are low productivity workers exposed more to the problems caused by high tax wedge?
Authored by: Marek Gora, Artur Radziwill, Agnieszka Sowa, Mateusz Walewski
Published in 2006
This paper discusses the processes of nominal and real convergence and their dependence on exchange rate regimes adopted in Central and Eastern European countries (CEECs) in thecontext of their future EMU accession. We focus our argument on the possibility of trade-off between the pace of disinflation and the maintenance of competitiveness and growth. Fixednominal exchange rate shifts the burden of adjustment on to the tradable sector but whether this pressure results in faster restructuring and faster productivity growth or becomes a straightjacket for the economy is an open question. The paper implements a simple empirical assessment of convergence of inflation to EU levels and economic growth of 7 CEE economies which had adopted different exchange rate regimes in period 1993-2002. Results indicate that fixed exchange rates seem to have been a better tool of fighting inflation as compared to floating exchange rates or intermediate regimes. The presence of a fixed exchange rate has also been characterised byhigher real GDP growth rates implying an absence of trade-off between nominal and real convergence in the investigated sample. Qualifications attached to these results are discussed.
Authored by: Przemyslaw Kowalski
Published in 2003
This paper quantifies transparency of monetary policy in the three EU New Member States that have adopted direct inflation targeting strategy. Two measures of transparency are applied. The institutional measure reflects the extent to which a central bank discloses information that is related to the policymaking process. The behavioural measure reflects the clarity among the financial market participants about the true course of monetary policy. The paper shows an ambiguous association between the two measures of transparency, which may be attributed to the active exchange rate management policy that undermines the actual transparency proxied by the behavioural measure.
Authored by: Mariusz Jarmuzek, Lucjan T. Orlowski, Artur Radziwill
Published in 2004
The empirical analysis of the determinants of institutional development in transition countries as well as the qualitative country studies summarized in this publication allow for some optimism concerning a potential impact of the EU on institution building and governance quality in CIS countries. Regression analysis reveals a positive impact of EU cooperation agreements below a membership perspective. Alternatively to the EU, entry into the NATO accession process also exerts incentives for better institutions which are often overlooked. In contrast, WTO membership is not found to have any impact on institution building in CIS countries. While there is room for some EU-related optimism given the results from the regression analysis it depends on the country-specific ENP action plans and programs whether or not ENP cooperation actually leads to Europeanization or institutional convergence towards EU standards in the CIS. The case studies on the effectiveness of Neighborhood Europeanization through ENP in Ukraine, Georgia, and Azerbaijan reveal that current EU policies towards these countries can be, at best, seen as a catalyst but not as a main driver of institutional convergence. A perspective for a stake in the internal market is on the long horizon for Ukraine only. ENP mechanisms for conflict resolution in Georgia and Azerbaijan have been rather weak before the recent clash in Abkhazia and South Ossetia. The top-down institutional convergence, i.e. an EU-first strategy, worked well for Enlargement Europeanization but implemented in the ENP it significantly reduces the leverage of the EU to create a ring of well-governed neighbour states.
Authored by: Thorsten Drautzburg, Andrea Gawrich, Inna Melnykovska, Rainer Schweickert
Published in 2008
Россия значительно улучшила свое положение в глобальных цепочках добавленной стоимости (global value chains или GVC) с середины 1990-х годов, говорилось в исследовании ЕЦБ, опубликованном прошлым летом. Авторы рассматривали изменения, произошедшие в период с 1995 по 2011 год.
he paper examines theoretical literature, recent EMU accession examples, and current CEECs performance in search of the optimal currency regime for meeting the Maastricht criteria. Currency board arrangements seems to provide the fastest convergence. For other regimes, the markets may have theoretical and historical reasons to believe in the government's temptation to devalue on the ERM-2 entry. The government should announce the final date, and, possibly indicate the final exchange rate for the regime switch to avoid excessive currency and yield volatility. It should also underscore the central bank’s and EU authorities importance (even if non-existent) in the parity setting process to avoid excessive domestic debt inflation premium ahead of the accession. Recent experience shows that it will be easy to get rid of the remaining influence of cross rates on CEECs exchange rates.
Authored by: Mateusz Szczurek
Published in 2003
The paper re-assesses the impact of exchange rate regimes on macroeconomic performance. We test for the relationship between de jure and de facto exchange rate classifications on the one hand, and inflation, output growth and output volatility on the other. We find that, once high-inflation outliers are excluded from the sample, only hard exchange rate pegs are associated with lower inflation compared to the floating regime. There is no significant relationship between output growth and exchange rate regimes, confirming results from previous studies. De jure pegged regimes (broadly defined) are correlated with higher output volatility, but this relationship is reversed for the de facto classification. The last result points to a potential endogeneity problem present when the de facto classification is used in testing for the relationship between exchange rate behavior and macroeconomic performance.
Authored by: Maryla Maliszewska, Wojciech Maliszewski
Published in 2004
This paper confronts the traditional balance-of-payments (BoP) analytical framework (with its dominant focus on the size of a given country’s current account imbalance and its external liabilities) with the contemporary realities of highly integrated international capital markets and cross-country capital mobility. Some key implicit assumptions of the traditional framework like those of a fixed residence of capital owners and home country bias are challenged and an alternative set of assumptions is offered. These reflect the unrestricted character of private capital flows (with no “home country bias” and fixed domicile) determined mostly by the expected rate of return. As a result, the importance of BoP constraints (in their “orthodox” interpretation) diminishes and they disappear completely with respect to individual member states within a highly integrated monetary union. This does not mean, however, immunization from other kinds of macroeconomic risks.
Authored by: Marek Dąbrowski
Published in 2006
This paper deals with the choice of the exchange rate parity upon Poland's entry to EMU. Given that the euro parity should reflect some equilibrium exchange rate, two theoretical concepts are discussed: fundamental and behavioural equilibrium exchange rates. These approaches are then estimated. According to these calculations, the zloty euro exchange rate in 2002 is not far from the level consistent with the current state of fundamentals (as indicted by BEER) and requires some depreciation to be in line with the equilibrium level of fundamentals (as indicated by FEER). The possible FEERs range between 3.88 and 4.08 zlotys per euro depending on the variant and REER definition. The results should be treated with great caution as they are demonstrated to be sensitive to the adopted assumptions and model specifications. It is argued that the range of "optimal" exchange rates is quiet wide. This stems from the fact that consequences of exchange rate misalignment depend primarily on its degree as well as due to the intrinsic uncertainty about empirical estimates of equilibrium exchange rate. Moreover, the scope for depreciation of the nominal zloty-euro exchange rate is limited by the ensuing costs to the economy, needs to meet Maastricht criteria, and political bargain.
Authored by: Łukasz Rawdanowicz
Published in 2002
This paper seeks the main factors behind inflation in Russia over the period 1996–2001. It presents a succinct description of Russian monetary policy and inflation developments. The econometric analysis establishes a long-run relationship between demand for the real money balances on the one side and the real income and short-term interest rate on the other side. It also presents several specifications of modeling shortrun dynamics of inflation. An account is made for the change in the exchange rate regime after the financial crisis of August 1998. It finds that apart from strong inertia, money expansion and exchange rate depreciation played a role in fueling the CPI. However, there were significant shifts in the underlying trends driving inflation during the studied period.
Until 1999 fiscal policy posed the biggest obstacle to the disinflation process in Russia. In 2000–2001 the main responsibility for sustained inflation pressure can be attributed to monetary policy trying to target money supply and exchange rate at the same time. The way out from this policy trap leads through the adoption of one of the so-called 'corner' solutions, i.e. either a permanently fixed exchange rate, or independent monetary policy under a free float regime. Taking into consideration a historically limited credibility of macroeconomic policy and the high level of dollarization, the first variant seems to be a better solution for Russia. However, its implementation would require the accompanying fiscal, banking and other structural reforms creating a healthy policy-mix and flexible microeconomic environment.
Authored by: Marek Dabrowski, Wojciech Paczynski, Łukasz Rawdanowicz
Published in 2002
The paper contributes to the recent empirical literature on real exchange rates in CEECs. Instead of estimating a complete model, the PPP and relative price models (two main components of the real exchange rate) are investigated separately. All empirical tests are conducted in the heterogonous dynamic panel framework. The unbalanced panel includes generally nine CEECs (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia) over 1993-2002.
Authored by: Łukasz Rawdanowicz
Published in 2004
This paper estimates responses to monetary shocks for several of the current members of the EMU (in the pre-EMU sample) and for the Central and East European (CEE) countries, along with the mean response in each of the groups. The problem of the short sample, especially acute in the case of the CEE, is mitigated by using a Bayesian estimation which combines information across countries. The estimated responses are similar across regions, but there is some evidence of more lagged and deeper price responses in the CEE economies. If this results from structural differences, premature entering the EMU would cause problems, but if from credibility issues, entering the EMU would be desirable. Also, with longer response lags, conducting a stabilizing monetary policy should be difficult in the CEE currently, and giving it up might not be a big loss after all.
Authored by: Marek Jarocinski
Published in 2004
The paper discusses the issue of labor force mobility in a broad sense, and analyses how changes in social security policy and the structure of the social safety net (SSN) affects different aspects of labor force mobility. The text is structured as follows: Introduction, then follows Chapter 2, which provides an overview of the labor market and social safety net developments in Russian and Ukraine over the last decade, as well as discusses common features of these countries. The Chapter 3 establishes theoretical models for different aspects of labor force mobility, discusses the availability of data on Russia and Ukraine to test these models, and provides a statistical analysis of the data. The Chapter 4 discusses results of the statistical analysis. The final chapter discusses policy conclusions that can be derived from comparison of the effect of the SSN on labor mobility in these two countries, and extends them to all countries in transition.
Authored by: Marek Gora, Oleksander Rohozynsky
Published in 2009
Labor migration from Eastern Europe and the member countries of Commonwealth of Independent States (CIS) to the Western countries became an important socio-economic issue. Since political systems and the nature of border management in these regions, migrations turned out to be a very complex and unpredictable issue. The purpose of this study is to analyze the region specific actors, practices and policies of migration in the Eastern countries, the possible scenarios and demographic consequences of the future migration flows. In order to address this issue properly, some of the complexities of labor migration phenomenon in the region are uncovered.
Authored by: Xavier Chojnicki, Ainura Uzagalieva
Published in 2008
The paper discusses possible directions and magnitudes of the relationship between the social security driven tax wedge, employment and shadow employment in Russia and Ukraine. The first section presents a summary of the economic and institutional background for development of the current size and structure of the socially driven tax wedge in both countries. The second section presents some theoretical considerations on the relationship between the social protection system, tax wedge, non-employment and finally, shadow employment. The third section contains an attempt to econometrically estimate the magnitude of the possible relationship between the tax wedge and total employment rates in both countries. In the fourth section, the authors try to discover the mechanism of influence of the last reform of the Ukrainian payroll tax system on the structure and size of shadow employment in the country. The last analytical section closes the circle leading the reader back from shadow employment to wages and finally to the issue of access to social security institutions. The last section concludes.
Authored by: Marek Gora, Oleksandr Rohozynsky, Irina Sinitsina, Mateusz Walewski
Published in 2009
This paper aims to devise a monetary policy instrument rule that is suitable for open economies undergoing monetary convergence to a common currency area. The open-economy convergence-consistent Taylor rule is forward-looking, consistent with monetary framework based on inflation targeting, containing input variables that are relative to the corresponding variables in the common currency area. The policy rule is tested empirically for three inflation targeting countries converging to the euro, i.e. the Czech Republic, Poland and Hungary. Stability tests of the input variables affirm prudent inclusion of these variables in the suggested policy rule. Empirical tests of the proposed instrument rule point to systemic differences in monetary policies among these euro-candidates. The Czech inflation targeting is forwardlooking relying on a sensible balance between inflation and output growth objectives. Poland's policy focuses on backward-looking inflation, while the Hungarian policy on exchange rate stability. Forecasts of policy instruments based on the prescribed rule are more accurate and reliable for the Czech Republic and Hungary, but less for Poland.
Authored by: Lucjan T. Orlowski
Published in 2008
This paper provides the results of analyses of key problems related to pension systems and their reforms in Russia and Ukraine. The pension systems and their reforms in both countries are compared. They are also compared with the general picture observed in the OECD or selected countries belonging to that area. The analysis focuses on long-term trends rather than short-term shocks. The recent economic crisis is not covered since the analysis was mostly completed by 2008.
Authored by: Marek Gora, Oleksandr Rohozynsky, Oksana Sinyavskaya
Published in 2010
The paper focuses on the social safety nets in Russian Federation and Ukraine in the view of changes on the labour market since the beginning of economic transition. The authors showed that many past phenomena (e.g. restructuring of the economy, wage and pension arrears, new groups at-risk-of-poverty, demographic transition) caused a need to change an old type social safety net (SSN) into the new one, better adapted to emerging more liberal economy problems.
Additionally, the authors analysed some gender specific issues related to social security that are caused mainly by inequalities in the labour market. Differences of earnings between men and women in Russia caused by sector segregation account for seem to be more important than the gap between gender earnings attributed to the position. In Ukraine the main contributors to gross gender differential of log earnings (that equals to 32%) explained by our model are sector segregation and occupation.
The authors also pointed out to future policy challenges in the area of social security systems in both countries. The retirement reforms introduced recently are a step in the right direction, although their impact will not be felt for a number of years. Other reforms, with more immediate results, are necessary. Social safety nets should be made more efficient and social benefits should be better targeted.
Authored by: Marek Gora, Grzegorz Kula, Oleksandr Rohozynsky, Magdalena Rokicka, Anna Ruzik-Sierdzinska
Published in 2009
This paper presents forecasts for the Financial Stress Index (FSI) and the Economic Sensitivity Index (ESI) for the period 2015-2015 for six countries in the region, namely the Czech Republic, Estonia, Hungary, Latvia, Lithuania and Poland. It is a continuation of the endeavor to construct synthetic indices measuring financial stress and economic sensitivity for twelve Central and East European countries using the Principal Component Analysis. In order to obtain forecasts of the FSI, we estimated Vector Autoregression (VAR) models on monthly data for the period 2001-2012 separately for all the countries. Using quarterly historical values of ESI and FSI, we estimated Dynamic Panel Data Model for the complete sample of countries. Parameters of the model were later used for forecasting the ESI. Obtained results suggest that the FSI will start to rise in 2014 in the Czech Republic, Lithuania, and Estonia. For Latvia and Hungary, we observed a conversion in the trend, i.e. at the beginning of 2015, when the index should start to fall. According to our forecasts, the ESI will be rising in the next two years, except for Hungary, where we predict a continuous decrease in economic sensitivity.
Authored by: Maciej Krzak and Grzegorz Poniatowski
Published in 2014
This paper is focused on the development of a proper macroeconomic strategy in the process of Poland's accession to the European Monetary Union. It is argued that due to legal and political considerations Poland may not opt out from EMU participation. The country will however command net gains from participation in the eurozone, mainly due to reduced macroeconomic and microeconomic uncertainty. In order to achieve even higher gains it is necessary to reduce price and wage rigidities, eliminate constraints on free movement of labor, further promote trade links with EU and its diversification. Loss of monetary and exchange rate instruments will require responsive but generally conservative fiscal policy. Particularly, as Poland might experience major economic upturn at the outset in the EU membership, the country should achieve positive budget balance by this time. It will allow for fiscal expansion in case of future negative asymmetric shock or recessions. Fiscal policy should be therefore assigned to improve saving-investment balance and consequently current account, so that direct inflation targeting is well placed to achieve fulfillment of Maastricht price stability criterion. Real exchange rate is not an independent instrument to target current account, as real appreciation of domestic currency is unavoidable due to rapid productivity gains in Poland. Finally, the accession to EMU should follow promptly the accession to EU. Unilateral introduction of Euro is too risky for banking and real sectors. Slower process of joining EMU would hamper credibility of macroeconomic adjustment commitment.
Authored by: Arthur Radziwill
Published in 2001
This paper focuses on roots of strain in the European Monetary Union (EMU). It argues that there is need for a thorough reform of the governance structure of the Union in conjunction with radical changes in the regulation and supervision of financial markets. Financial intermediation has gone astray in recent decades and entailed a big bubble in the industrialized world. Waves of financial deregulation have enhanced systemic risks, via speculative behavior and growing inter-connectedness. Moreover, the EMU was sub-optimal from its debut and competitiveness gaps did not diminish against the backdrop of its inadequate policy and institutional design. The euro zone crisis is not related to fiscal negligence only; over-borrowing by the private sector and poor lending by banks, as well as a one-sided monetary policy, also explain this debacle. The EMU needs to complement its common monetary policy with solid fiscal/budget underpinnings. Fiscal rules and sanctions are necessary, but not sufficient. A common treasury (a federal budget) is needed in order to help the EMU absorb shocks and forestall confidence crises. A joint system of regulation and supervision of financial markets should operate. Emergency measures have to be comprehensive and acknowledge the necessity of a lender of last resort; they have to combat vicious circles. Structural reforms and EMU level policies are needed to enhance competitiveness in various countries and foster convergence. The EU has to work closely with the US and other G20 members in order to achieve a less unstable global financial system.
Authored by: Daniel Daianu
Published in 2012
Demographic change (driven by the second demographic transition) led to an uncontrolled increase in scale of various social expenditure in the OECD area, especially in continental Europe. Costs of social transfers created fiscal pressure leading to the necessity of tax increases all over Europe, including the New Member States. Employment consequences of emerging higher tax wedge has become the topic of large body of research. However, surprisingly little evidence is known on distribution of that problem across workers. Is the effect of high tax wedge equally spread or certain groups of workers suffer more than others? More specifically, are low productivity workers exposed more to the problems caused by high tax wedge?
Authored by: Marek Gora, Artur Radziwill, Agnieszka Sowa, Mateusz Walewski
Published in 2006
This paper discusses the processes of nominal and real convergence and their dependence on exchange rate regimes adopted in Central and Eastern European countries (CEECs) in thecontext of their future EMU accession. We focus our argument on the possibility of trade-off between the pace of disinflation and the maintenance of competitiveness and growth. Fixednominal exchange rate shifts the burden of adjustment on to the tradable sector but whether this pressure results in faster restructuring and faster productivity growth or becomes a straightjacket for the economy is an open question. The paper implements a simple empirical assessment of convergence of inflation to EU levels and economic growth of 7 CEE economies which had adopted different exchange rate regimes in period 1993-2002. Results indicate that fixed exchange rates seem to have been a better tool of fighting inflation as compared to floating exchange rates or intermediate regimes. The presence of a fixed exchange rate has also been characterised byhigher real GDP growth rates implying an absence of trade-off between nominal and real convergence in the investigated sample. Qualifications attached to these results are discussed.
Authored by: Przemyslaw Kowalski
Published in 2003
This paper quantifies transparency of monetary policy in the three EU New Member States that have adopted direct inflation targeting strategy. Two measures of transparency are applied. The institutional measure reflects the extent to which a central bank discloses information that is related to the policymaking process. The behavioural measure reflects the clarity among the financial market participants about the true course of monetary policy. The paper shows an ambiguous association between the two measures of transparency, which may be attributed to the active exchange rate management policy that undermines the actual transparency proxied by the behavioural measure.
Authored by: Mariusz Jarmuzek, Lucjan T. Orlowski, Artur Radziwill
Published in 2004
The empirical analysis of the determinants of institutional development in transition countries as well as the qualitative country studies summarized in this publication allow for some optimism concerning a potential impact of the EU on institution building and governance quality in CIS countries. Regression analysis reveals a positive impact of EU cooperation agreements below a membership perspective. Alternatively to the EU, entry into the NATO accession process also exerts incentives for better institutions which are often overlooked. In contrast, WTO membership is not found to have any impact on institution building in CIS countries. While there is room for some EU-related optimism given the results from the regression analysis it depends on the country-specific ENP action plans and programs whether or not ENP cooperation actually leads to Europeanization or institutional convergence towards EU standards in the CIS. The case studies on the effectiveness of Neighborhood Europeanization through ENP in Ukraine, Georgia, and Azerbaijan reveal that current EU policies towards these countries can be, at best, seen as a catalyst but not as a main driver of institutional convergence. A perspective for a stake in the internal market is on the long horizon for Ukraine only. ENP mechanisms for conflict resolution in Georgia and Azerbaijan have been rather weak before the recent clash in Abkhazia and South Ossetia. The top-down institutional convergence, i.e. an EU-first strategy, worked well for Enlargement Europeanization but implemented in the ENP it significantly reduces the leverage of the EU to create a ring of well-governed neighbour states.
Authored by: Thorsten Drautzburg, Andrea Gawrich, Inna Melnykovska, Rainer Schweickert
Published in 2008
Россия значительно улучшила свое положение в глобальных цепочках добавленной стоимости (global value chains или GVC) с середины 1990-х годов, говорилось в исследовании ЕЦБ, опубликованном прошлым летом. Авторы рассматривали изменения, произошедшие в период с 1995 по 2011 год.
he paper examines theoretical literature, recent EMU accession examples, and current CEECs performance in search of the optimal currency regime for meeting the Maastricht criteria. Currency board arrangements seems to provide the fastest convergence. For other regimes, the markets may have theoretical and historical reasons to believe in the government's temptation to devalue on the ERM-2 entry. The government should announce the final date, and, possibly indicate the final exchange rate for the regime switch to avoid excessive currency and yield volatility. It should also underscore the central bank’s and EU authorities importance (even if non-existent) in the parity setting process to avoid excessive domestic debt inflation premium ahead of the accession. Recent experience shows that it will be easy to get rid of the remaining influence of cross rates on CEECs exchange rates.
Authored by: Mateusz Szczurek
Published in 2003
The paper re-assesses the impact of exchange rate regimes on macroeconomic performance. We test for the relationship between de jure and de facto exchange rate classifications on the one hand, and inflation, output growth and output volatility on the other. We find that, once high-inflation outliers are excluded from the sample, only hard exchange rate pegs are associated with lower inflation compared to the floating regime. There is no significant relationship between output growth and exchange rate regimes, confirming results from previous studies. De jure pegged regimes (broadly defined) are correlated with higher output volatility, but this relationship is reversed for the de facto classification. The last result points to a potential endogeneity problem present when the de facto classification is used in testing for the relationship between exchange rate behavior and macroeconomic performance.
Authored by: Maryla Maliszewska, Wojciech Maliszewski
Published in 2004
This paper confronts the traditional balance-of-payments (BoP) analytical framework (with its dominant focus on the size of a given country’s current account imbalance and its external liabilities) with the contemporary realities of highly integrated international capital markets and cross-country capital mobility. Some key implicit assumptions of the traditional framework like those of a fixed residence of capital owners and home country bias are challenged and an alternative set of assumptions is offered. These reflect the unrestricted character of private capital flows (with no “home country bias” and fixed domicile) determined mostly by the expected rate of return. As a result, the importance of BoP constraints (in their “orthodox” interpretation) diminishes and they disappear completely with respect to individual member states within a highly integrated monetary union. This does not mean, however, immunization from other kinds of macroeconomic risks.
Authored by: Marek Dąbrowski
Published in 2006
This paper deals with the choice of the exchange rate parity upon Poland's entry to EMU. Given that the euro parity should reflect some equilibrium exchange rate, two theoretical concepts are discussed: fundamental and behavioural equilibrium exchange rates. These approaches are then estimated. According to these calculations, the zloty euro exchange rate in 2002 is not far from the level consistent with the current state of fundamentals (as indicted by BEER) and requires some depreciation to be in line with the equilibrium level of fundamentals (as indicated by FEER). The possible FEERs range between 3.88 and 4.08 zlotys per euro depending on the variant and REER definition. The results should be treated with great caution as they are demonstrated to be sensitive to the adopted assumptions and model specifications. It is argued that the range of "optimal" exchange rates is quiet wide. This stems from the fact that consequences of exchange rate misalignment depend primarily on its degree as well as due to the intrinsic uncertainty about empirical estimates of equilibrium exchange rate. Moreover, the scope for depreciation of the nominal zloty-euro exchange rate is limited by the ensuing costs to the economy, needs to meet Maastricht criteria, and political bargain.
Authored by: Łukasz Rawdanowicz
Published in 2002
In this paper I estimate a Bayesian structural VAR models for the Czech Republic and Poland, allowing for changes in parameters between the two monetary policy arrangements. The four-variables structural VAR methodology adopted in the study is successful in identifying monetary policy shocks and their effects for the Czech and Polish economies. The time-varying model is capable of detecting a change in the policy reaction function consistent with introduction of the floating exchange rate system and switching to short-term interest rate as the main policy instrument. The results indicate the dominant role of exchange rate in the monetary transmission mechanism.
Authored by: Wojciech Maliszewski
Published in 2002
Labor migration from Eastern Europe and the member countries of Commonwealth of Independent States (CIS) to the Western countries became an important socio-economic issue. Since political systems and the nature of border management in these regions, migrations turned out to be a very complex and unpredictable issue. The purpose of this study is to analyze the region specific actors, practices and policies of migration in the Eastern countries, the possible scenarios and demographic consequences of the future migration flows. In order to address this issue properly, some of the complexities of labor migration phenomenon in the region are uncovered.
Authored by: Xavier Chojnicki, Ainura Uzagalieva
Published in 2008
This paper reports the progress of nominal and real convergence of Spain, Portugal and Greece during their accession to the Economic and Monetary Union (EMU). When the EMU was designed, it was hoped that it would induce nominal convergence (convergence of interest rates and inflation rates) and stimulate investments and economic growth through its positive microeconomic effects. As had been expected, nominal interest rates have converged quite early during the accession, output has been growing fast, and the countries experienced an inflow of foreign direct investments (FDI) and an increase of domestic investment rates. However, once within the EMU, all three countries experienced persistently higher inflation rates, which may be consistent with the convergence of price levels, instead of inflation. While all the above phenomena can be related to the EMU accession, in an econometric estimation for Spain in which we control for macroeconomic policies, we are unable to detect significant microeconomic effects of the EMU. Therefore, we conclude that it is the policies induced by the necessity to satisfy the Maastricht criteria that matter primarily for the macroeconomic performance soon after accession. In any case, the experience of the SPG is encouraging for the new member states facing accession to the EMU in the future.
Authored by: Marek Jarocinski
Published in 2003
This paper provides an illustration of the changing tolerance for inequality in a context of radical political and economic transformation and rapid economic growth. We focus on the Polish transition experience, and explore individuals' self-reported attitudes. Using unusually long and frequent (monthly) representative surveys of the population, carried out by the Polish poll institute (CBOS) from 1992 to 2005, we identify a structural break in the relationship between income inequality and subjective well-being. The downturn in the tolerance for inequality (1997) coincides with increasing distrust of political elites.
Authored by: Irena Grosfeld and Claudia Senik
Published in 2008
This paper reviews the published literature on the definition and measurement of the administrative and compliance costs of taxation, with special reference to VAT (including evasion and fraud) in the European Union.
Written by Luca Barbone, Richard M. Bird, and Jaime Vasquez-Caro. Published in March, 2012.
See more on our website: http://www.case-research.eu/en/node/57573
The paper discusses the role of regional public goods vs. global goods in influencing postcommunist transition in Central and Eastern Europe and former USSR with special attention given to three particular factors: (i) external anchoring of national reform process; (ii) international trade arrangements and (iii) international financial stability.
Authored by: Marek Dabrowski, Artur Radziwill
Published in 2007
This paper investigates the extent of macroeconomic volatility caused by the transfer pricing behavior of multinational corporations. The study examined two possible transmission channels through which transfer pricing causes macroeconomic volatility, namely, terms of trade and budget policy channels. Using the EGARCH model with annual data on selected variables from 1980 to 2017, the paper found evidence of macroeconomic volatility caused by transfer pricing. The size of the shock from transfer pricing is high and statistically significant in the terms of trade and budget policy channels. Negative shock from multinational corporations shifting taxable income between high and low tax regimes had a larger effect than a positive shock on the country’s budget policy. The volatility caused by transfer pricing was short-lived in the terms of trade channel. However, in the budget policy channel, past volatility of transfer pricing persisted for a longer period to explain current volatility.
The purpose of this paper is to look at implications of the EMU accession on international trade flows of the new member states with members of the enlarged EU. I begin with the evaluation of an early impact of the EMU on trade based on a gravity model. The results are then employed in the calculation of potential levels of trade of the Central and East European countries. The results show a high degree of trade integration between most of the new member states and the EU except for Latvia, Lithuania and Poland. In trade among the new member states, potential trade flows by far exceed actual levels for all countries except the Czech Republic and Slovakia.
Authored by: Maryla Maliszewska
Published in 2004
The The purpose of this paper is to analyze the various challenges facing European integration and the EU institutional architecture as result of the global financial crisis. The European integration process is not yet complete, both in terms of its content and geographical coverage. It can be viewed as a kind of intermediate hybrid between an international organization and a federation, subject to further evolution. This is also true of the Single European Market and the Economic and Monetary Union, which form the core of the EU economic architecture. Certain policy prerogatives (such as external trade, competition, and the Common Agriculture Policy) are delegated to the supranational level while others (such as financial supervision or fiscal policy) remain largely in the hands of national authorities.
Authored by: Marek Dąbrowski
Published in 2009
Latin America has been strongly affected by the international crisis and recession since late 2008. In comparison to historical experience, how has Latin America coped with the global crisis, which has been the role of different transmission mechanisms, and how have the region's structural and policy conditions affected its sensitivity to foreign shocks? Moreover, what policies can protect the region better from world crises and shocks, and to which extent should it rely on a strategy of close trade and financial integration into a world economy punctuated by shocks and crises? This paper addresses the latter questions in three steps. First, by assessing empirically the sensitivity of growth in the region's seven major economies during 1990-2009 to large number of structural and cyclical factors, based on high-frequency panel-data estimations. Second, by using the latter results to decompose the amplitude of GDP reductions in both recessions according to the individual and combined contribution of the different growth factors. Third, to derive the main implications of the results for the choice of macroeconomic regimes and development strategies.
Authored by: Vittorio Corbo and Klaus Schmidt-Hebbel
Published in 2011
The paper discusses the current and potential role of the European Neighbourhood Policy (ENP) in anchoring economic reforms in the countries of the EU's Eastern Neighbourhood. It claims that it is too early to assess the success of the ENP in this sphere especially given that the actual progress of the ENP agenda has been limited. A review of the empirical evidence on external reform anchors confirms that the ENP shares some features with the EU accession process that has proven to be an effective mechanism supporting major economic, political and social changes in the countries concerned. The eventual ENP economic offer is meaningful and integration with the EU is getting stronger public support in several CIS countries and among their political elites. On the other hand several factors limit the reform anchoring potential of the ENP. This paper offers recommendations on policies that could strengthen this potential.
Authored by: Wojciech Paczynski
Published in 2009
The identification of a possible European business cycle has been inconclusive and is complicated by the enlargement to the new member states and their transition to market economies. This paper shows how to decompose a business cycle into a time-frequency framework in a way that allows us to accommodate structural breaks and nonstationary variables. To illustrate, calculations of the growth rate spectrum and coherences for the Hungarian, Polish, German and French economies show the instability of the transition period. However, since then there has been convergence on the Eurozone economy at short cycle lengths, but little convergence in long cycles. We argue that this shows evidence of nominal convergence, but little real convergence. The Maastricht criteria for membership of the Euro therefore need to be adapted to test for real convergence.
Authored by: Andrew Hughes Hallett, Christian R. Richter
Published in 2007
The paper first considers why central European countries wish to join EMU soon. The main reasons are the risk of macroeconomic instability they face outside the euro zone if they wish to grow quickly. At the same time, Central Europe is highly integrated as regards trade with EMU, so it is little exposed to asymmetric shocks that would require a realignment of exchange rates. Finally, it is argued that there is no cost in terms of slower growth from EMU accession, so that there is no trade-off, as has been claimed, between nominal convergence to EMU and real convergence to EU average GDP levels. Second, the paper assesses whether Central European accession to EMU would be disadvantageous to current members. It concludes that accession cannot increase inflationary pressure on existing EMU members, as has been claimed, but that slow growing members of EMU might suffer increased unemployment, unless they increase the flexibility of their labour markets. Incumbent members may also be unwilling to share power with Central Europeans in EMU institutions.
Authored by: Jacek Rostowski
Published in 2003
The Greek bail-out was highly controversial. An oft-heard assessment is that i) the bail-out was a mistake, ii) the political haggling over it was irrational and iii) the bail-out will create a moral hazard problem. Contrary to this view, our analysis suggests that, given EMU’s present political-economic set-up, i) the bail-out was unavoidable, ii) the lengthy process of political haggling leading to it was understandable, and iii) the bail-out does not have to be necessarily associated with a future moral hazard problem. Based on our analysis, we suggest that the EMU’s institutional design could be improved by establishing ‘exit rules’ and that bail-outs should be made rule-based. We have based our analysis on a politicaleconomic, game-theoretic model that helps to understand why and how the parties involved in the Greek crisis arrived at the bail-out and on what conditions the final solution depended. The model allows tracing analytically the dynamics of the negotiation processes as well as the conditions and parameters on which the scope and limits of fiscal redistribution in EMU depends. In doing so, we formally take account of the ‘negative externality’ problem that has been central to policy debates related to the EMU’s institutional design and has played an important role in the Greek crisis. However, contrary to the existing literature, we do not only focus on the economic aspects of such negative externality, but also look at where they emanate from and interact with political factors, in particular the dynamics of the political negotiation process within the EMU.
Authored by: Christian Fahrholz, Cezary Wojcik
Published in 2010
The paper discusses possible directions and magnitudes of the relationship between the social security driven tax wedge, employment and shadow employment in Russia and Ukraine. The first section presents a summary of the economic and institutional background for development of the current size and structure of the socially driven tax wedge in both countries. The second section presents some theoretical considerations on the relationship between the social protection system, tax wedge, non-employment and finally, shadow employment. The third section contains an attempt to econometrically estimate the magnitude of the possible relationship between the tax wedge and total employment rates in both countries. In the fourth section, the authors try to discover the mechanism of influence of the last reform of the Ukrainian payroll tax system on the structure and size of shadow employment in the country. The last analytical section closes the circle leading the reader back from shadow employment to wages and finally to the issue of access to social security institutions. The last section concludes.
Authored by: Marek Gora, Oleksandr Rohozynsky, Irina Sinitsina, Mateusz Walewski
Published in 2009
This paper is concentrated on the comparative macroeconomic analysis of the differences stemming from the extent to which the institutional framework of the currency board arrangement is implemented in the legal and regulatory systems in the different countries.
The main objective of taking into consideration and examining the currency board institutional arrangements is to distinguish between the impact that currency board countries and countries with pegged exchange rate have on different macroeconomic indicators. During the analysis of these two extreme representatives of the fixed exchange rate mechanism, a third group of countries naturally emerges, which consists of countries acting like currency boards but without official, legal implementation of this arrangement. Once the distinction among all 22 countries taken into consideration had been made, the main scope of the analysis concentrates on the econometric estimation of the currency boards' effects over inflation, nominal and real interest rates and economic growth in countries under currency board and all other pegged exchange rate economies.
Authored by: Lubomira Anastassova
Published in 2000
This paper proposes a new method for measuring the degree to which the domestic capital stock is self-financed. The main idea is to use the national accounts to construct a self-financing ratio, indicating what would have been the autarky stock of tangible capital supported by actual past domestic past saving, relative to the actual stock of capital. We use the constructed measure of self-financing to evaluate the impact of the growing global financial integration on the sources of financing domestic capital stocks in developing countries. On average, 90% of the stock of capital in developing countries is self financed, and this fraction was surprisingly stable throughout the 1990s. The greater integration of financial markets has not changed the dispersion of self-financing rates, and the correlation between changes in de-facto financial integration and changes in self-financing ratios is statistically insignificant. There is no evidence of any "growth bonus" associated with increasing the financing share of foreign savings. In fact, the evidence suggests the opposite: throughout the 1990s, countries with higher self-financing ratios grew significantly faster than countries with low self-financing ratios. This result persists even after controlling growth for the quality of institutions. We also find that higher volatility of the self-financing ratios is associated with lower growth rates, and that better institutions are associated with lower volatility of the self-financing ratios. These findings are consistent with the notion that financial integration may have facilitated diversification of assets and liabilities, but failed to offer new net sources of financing capital in developing countries.
Authored by: Joshua Aizenman, Brian Pinto, Artur Radziwill
Published in 2004
Similar to CASE Network Studies and Analyses 248 - Exchange Rate Regimes and the Real Sector: a Sectoral Analysis of CEE Countries (20)
The report examines the social and economic drivers and impact of circular migration between Belarus and Poland, Slovakia, and the Czech Republic. The core question the authors sought to address was how managing circular migration could, in the long term, help to optimise labour resources in both the country of origin and the destination countries. In the pages that follow, the authors of the report present the current and forecasted labour market and demographic situation in their respective countries as well as the dynamics and characteristics of short-term labour migration flows between Belarus and Poland, Slovakia, and the Czech Republic, concentrating on the period since 2010. They also outline and discuss related policy responses and evaluate prospects for cooperation on circular migration.
Podręcznik został opracowany w celu przekazania trenerom i nauczycielom podstawowej wiedzy, która może być przydatna w prowadzeniu szkoleń promujących pracę rejestrowaną. Prezentuje on z jednej strony korzyści z pracy rejestrowanej, z drugiej – potencjalne koszty związane z pracą nierejestrowaną. W pierwszej kolejności informacje te przedstawiono w odniesieniu do pracowników najemnych (rozdział 2), podkreślając w sposób szczególny to, że negatywne konsekwencje pracy nierejestrowanej są ponoszone przez całe życie. Ze względu na specyficzną sytuację cudzoziemców pracujących w Polsce konsekwencje ponoszone przez tę grupę opisano oddzielnie (rozdział 3). Ponadto zaprezentowano skutki dotyczące pracodawców z szarej strefy z wyodrębnieniem tych, którzy zatrudniają cudzoziemców (rozdział 4). Uzupełnieniem przedstawionych informacji jest opis działań podejmowanych przez państwo w celu ograniczenia zjawiska pracy nierejestrowanej w Polsce (rozdział 5) oraz prowadzonych w Wielkiej Brytanii, czyli w kraju będącym liderem w walce z szarą strefą (rozdział 6).
European countries face a challenge related to the economic and social consequences of their societies’ aging. Specifically, pension systems must adjust to the coming changes, maintaining both financial stability, connected with equalizing inflows from premiums and spending on pensions, and simultaneously the sufficiency of benefits, protecting retirees against poverty and smoothing consumption over their lives, i.e. ensuring the ability to pay for consumption needs at each stage of life, regardless of income from labor.
One of the key instruments applied toward these goals is the retirement age. Formally it is a legally established boundary: once people have crossed it – on average – they significantly lose their ability to perform work (the so-called old-age risk). But since the 1970s, in many developed countries the retirement age has become an instrument of social and labor-market policy. Specifically, in the 1970s and ‘80s, an early retirement age was perceived as a solution allowing a reduction in the supply of labor, particularly among people with relatively low competencies who were approaching retirement age, which is called the lump of labor fallacy. It was often believed that people taking early retirement freed up jobs for the young. But a range of economic evidence shows that the number of jobs is not fixed, and those who retire don’t in fact free up jobs. On the contrary, because of higher spending by pension systems, labor costs rise, which limits the supply of jobs. In general, a good situation on the labor market supports employment of both the youngest and the oldest labor force participants. Additionally, a lower retirement age for women was maintained, which resulted to a high degree from cultural conditions and norms that are typical for traditional societies.
Until now, the banking sector has been one of the strong points of Poland’s economy. In contrast to banks in the U.S. and leading Western European economies, lenders in Poland came through the 2008 global financial crisis without a scratch, without needing state financial support. But in recent years the industry’s problems have been growing, creating a threat to economic growth and gains in living standards.
For an economy’s productivity to increase, funds can’t go to all companies evenly, and definitely shouldn’t go to those that are most lacking in funds, but to those that will use them most efficiently. This is true of total external financing, and thus funding both from the banking sector and from parabanks, the capital market and funds from public institutions. In Poland, in light of the relatively modest scale of the capital market, banks play a clearly dominant role in external financing of companies. This is why the author of this text focuses on the bank credit allocation efficiency.
The author points out that in the very near future, conditions will emerge in Poland which – as the experience of other countries shows – create a risk of reduced efficiency of credit allocation to business. Additionally, in Poland today, bank lending to companies is to a high degree being replaced by funds from state aid, which reduces the efficiency of allocation of external funds to companies (both loans and subsidies), as allocation of government subsidies is not usually based on efficiency. This decline in external financing allocation efficiency may slow, halt or even reverse the process, that has been uninterrupted for 28 years, of Poland’s convergence, i.e. the narrowing of the gap in living standards between Poland and the West.
The economic characteristics of the COVID-19 crisis differ from those of previous crises. It is a combination of demand- and supply-side constraints which led to the formation of a monetary overhang that will be unfrozen once the pandemic ends. Monetary policy must take this effect into consideration, along with other pro-inflationary factors, in the post-pandemic era. It must also think in advance about how to avoid a policy trap coming from fiscal dominance.
This paper is organized as follows: Chapter 2 deals with the economic characteristics of the COVID-19 pandemic and its impact on the effectiveness of the monetary policy response measures undertaken. In Chapter 3, we analyse the monetary policy decisions of the ECB (and other major CBs for comparison) and their effectiveness in achieving the declared policy goals in the short term. Chapter 4 is devoted to an analysis of the policy challenges which may be faced by the ECB and other major CBs once the pandemic emergency comes to its end. Chapter 5 contains a summary and the conclusions of our analysis.
Purpose: This paper tries to identify the wage gap between informal and formal workers and tests for the two-tier structure of the informal labour market in Poland.
Design/methodology/approach: I employ the propensity score matching (PSM) technique and use data from the Polish Labour Force Survey (LFS) for the period 2009–2017 to estimate the wage gap between informal and formal workers, both at the means and along the wage distribution. I use two definitions of informal employment: a) employment without a written agreement and b) employment while officially registered as unemployed at a labour office. In order to reduce the bias resulting from the non-random selection of
individuals into informal employment, I use a rich set of control variables representing several individual characteristics.
Findings: After controlling for observed heterogeneity, I find that on average informal workers earn less than formal workers, both in terms of monthly earnings and hourly wage. This result is not sensitive to the definition of informal employment used and is
stable over the analysed time period (2009–2017). However, the wage penalty to informal employment is substantially higher for individuals at the bottom of the wage distribution, which supports the hypothesis of the two-tier structure of the informal labour market in Poland.
Originality/value: The main contribution of this study is that it identifies the two-tier structure of the informal labour market in Poland: informal workers in the first quartile of the wage distribution and those above the first quartile appear to be in two partially different segments of the labour market.
The rule of law, by securing civil and economic rights, directly contributes to social prosperity and is one of our societies’ greatest achievements. In the European Union (EU), the rule of law is enshrined in the Treaties of its founding and is recognised not just as a necessary condition of a liberal democratic society, but also as an important requirement for a stable, effective, and sustainable market economy. In fact, it was the stability and equality of opportunity provided by the rule of law that enabled the post-war Wirtschaftswunder in Germany and the post-Communist resuscitation of the economy in Poland.
But the rule of law is a living concept that is constantly evolving – both in its formal, de jure dimension, embodied in legislation, and its de facto dimension, or its reception by society. In Poland, in particular, according to the EU, the rule of law has been heavily challenged by government since 2015 and has evolved amid continued pressure exerted on the institutions which execute laws. More recently, the outbreak of the COVID-19 pandemic transformed the perception of the rule of law and its boundaries throughout the EU and beyond (Marzocchi, 2020).
This Study contains Value Added Tax (VAT) Gap estimates for 2018, fast estimates using a simplified methodology for 2019, the year immediately preceding the analysis, and includes revised estimates for 2014-2017. It also includes the updated and extended results of the econometric analysis of VAT Gap determinants initiated and initially reported in the 2018 Report (Poniatowski et al., 2018). As a novelty, the econometric analysis to forecast potential impacts of the coronavirus crisis and resulting recession on the evolution of the VAT Gap in 2020 is reported.
In 2018, most European Union (EU) Member States (MS) saw a slight decrease in the pace of gross domestic product (GDP) growth, but the economic conditions for increasing tax compliance remained favourable. We estimate that the VAT total tax liability (VTTL) in 2018 increased by 3.6 percent whereas VAT revenue increased by 4.2 percent, leading to a decline in the VAT Gap in both relative and nominal terms. In relative terms, the EU-wide Gap dropped to 11 percent and EUR 140 billion. Fast estimates show that the VAT Gap will likely continue to decline in 2019.
Of the EU-28, the smallest Gaps were observed in Sweden (0.7 percent), Croatia (3.5 percent), and Finland (3.6 percent), the largest – in Romania (33.8 percent), Greece (30.1 percent), and Lithuania (25.9 percent). Overall, half of the EU-28 MS recorded a Gap above 9.2 percent. In nominal terms, the largest Gaps were recorded in Italy (EUR 35.4 billion), the United Kingdom (EUR 23.5 billion), and Germany (EUR 22 billion).
The euro is the second most important global currency after the US dollar. However, its international role has not increased since its inception in 1999. The private sector prefers using the US dollar rather than the euro because the financial market for US dollar-denominated assets is larger and deeper; network externalities and inertia also play a role. Increasing the attractiveness of the euro outside the euro area requires, among others, a proactive role for the European Central Bank and completing the Banking Union and Capital Market Union.
Forecasting during a strong shock is burdened with exceptionally high uncertainty. This gives rise to the temptation to formulate alarmist forecasts. Experiences from earlier pandemics, particularly those from the 20th century, for which we have the most data, don’t provide a basis for this. The mildest of them weakened growth by less than 1 percentage point, and the worst, the Spanish Flu, by 6 percentage points. Still, even the Spanish Flu never caused losses on the order of 20% of GDP – not even where it turned out to be a humanitarian disaster, costing the lives of 3-5% of the population. History suggests that if pandemics lead to such deep losses at all, it’s only in particular quarters and not over a whole year, as economic activity rebounds. The strength of that rebound is largely determined by economic policy. The purpose of this work is to describe possible scenarios for a rebound in Polish economic growth after the epidemic.
A separate issue, no less important, is what world will emerge from the current crisis. In the face of the 2008 financial crisis, White House Chief of Staff Rahm Emanuel said: “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.” Such changes can make the economy and society function better than before the crisis. Unfortunately, the opportunities created by the global financial crisis were squandered. Today’s task is more difficult; the scale of various problems has expanded even more. Without deep structural and institutional changes, the world will be facing enduring social and economic problems, accompanied by long-term stagnation.
"Many brilliant prophecies have appeared for the future of the EU and our entire planet. I believe that Europe, in its own style, will draw pragmatic conclusions from the crisis, not revolutionary ones; conclusions that will allow us to continue enjoying a Europe without borders. Brussels will demonstrate its usefulness; it will react ably and flexibly. First of all, contrary to the deceitful statements of members of the Polish government, the EU warned of the threats already in 2021. Secondly, already in mid-March EU assistance programs were ready, i.e. earlier than the PiS government’s “shield” program. The conclusion from the crisis will be a strengthening of all the preventive mechanisms that allow us to recognize threats and react in time of need. Research programs will be more strongly directed toward diagnosing and treating infectious diseases. Europe will gain greater self-sufficiency in the area of medical equipment and drugs, and the EU – greater competencies in the area of the health service, thus far entrusted to the member states. The 2021-27 budget must be reconstructed, to supplement the priority of the Green Deal with economic stimulus programs. In this way structural funds, which have the greatest multiplier effect for investment and the labor market, may return to favor. So once again: an addition, as a conclusion from the crisis, and not a reinvention of the EU," writes Dr. Janusz Lewandowski the author of the 162nd mBank-CASE seminar Proceeding.
Dla wielu rodaków europejskość Polski jest oczywista, trudno jest im nawet wyobrazić sobie, jak kształtowałyby się losy naszego kraju bez uczestnictwa w integracji europejskiej. Szczególnie młode pokolenie traktuje osiągnięty przez nas dzięki uczestnictwie w Unii ogromny postęp cywilizacyjny jako coś danego i naturalnego. Jednak świadomość tego, jaki był nasz punkt wyjścia, jaką przeszliśmy drogę i jak przyczyniły się do tego unijne działania oraz jakie wynikały z tego korzyści powinna nam stale towarzyszyć. Bez tej świadomości, starannego weryfikowania faktów i docenienia naszych osiągnięć grozi nam uleganie niesprawdzonym argumentom przeciwników integracji europejskiej i popełnienie nieodwracalnych błędów. Dla tych, którzy chcą poznać te fakty, przygotowany został raport "Nasza Europa. 15 lat Polski w Unii Europejskiej". Podjęto w nim ocenę 15 lat członkostwa Polski z perspektywy doświadczeń procesu integracji, z jego barierami i sukcesami, a także wyzwaniami przyszłości.
Raport jest wynikiem pracy zbiorowej licznych ekspertów z różnych dziedzin, od wielu lat analizujących wielowymiarowe efekty działania instytucji UE oraz współpracy z krajami członkowskimi na podstawie europejskich wartości i mechanizmów. Autorzy podsumowują korzyści członkostwa Polski w Unii Europejskiej na podstawie faktów, nie stroniąc jednakże od własnych ocen i refleksji.
This report is the result of the joint work of a number of experts from various fields who have been - for many years – analysing the multidimensional effects of EU institutions and cooperation with Member States pursuant to European values and mechanisms. The authors summarise the benefits of Poland’s membership in the EU based on facts; however, they do not hide their own views and reflections. They also demonstrate the barriers and challenges to further European integration.
This report was prepared by CASE, one of the oldest independent think tanks in Central and Eastern Europe, utilising its nearly 30 years of experience in providing objective analyses and recommendations with respect to socioeconomic topics. It is both an expression of concern about Poland’s future in the EU, as well as the authors’ contribution to the debate on further European integration.
Poland’s new Employee Capital Plans (PPK) scheme, which is mandatory for employers, started to be implemented in July 2019. The article looks at the systemic solutions applied in the programme from the perspective of the concept of the simultaneous reconstruction of the retirement pension system. The aim is to present arguments for and against the project from the point of view of various actors, and to assess the chances of success for the new system. The article offers a detailed study of legal solutions, an analysis of the literature on the subject, and reports of institutions that supervise pension funds. The results of this analysis point to the lack of cohesion between certain solutions of the 1999 pension reform and expose a lack of consistency in how the reform was carried out, which led to the eventual removal of the capital part of the pension system. The study shows that additional saving for old age is advisable in the country’s current demographic situation and necessary for both economic and social reasons. However, the systemic solutions offered by the government appear to be chiefly designated to serve short-term state interests and do not create sufficient incentives for pension plan participants to join the programme.
Belarus was among the few post-communist countries to resign from comprehensive market reforms and attempt to improve the efficiency of the economy through administrative means, leaving market mechanisms only an auxiliary role. Since its inception, the ‘Belarusian economic model’ has undergone several revisions of a de-statisation and de-regulation kind, but still the Belarusian economy remains dominated by the state. This paper analyses the characteristic features of the Belarusian economic system – especially those related to the public sector – as well as its evolution over time during the period following its independence. The paper concludes that during the post-Soviet period, the Belarusian economy evolved from a quasi-Soviet system based on state property, state planning, support to inefficient enterprises and the massive redistribution of funds to a more flexible hybrid model where the public sector still remains the core of the economy. The case of Belarus shows that presently there is no appropriate theoretical perspective which, in an unmodified form, could be applied to study this type of economic system. Therefore, a new perspective based on an already existing but updated approach or a multidisciplinary approach that incorporates the duality of the Belarusian economy is required.
Belarusian economy has been stagnating in 2011-2015 after 15 years of a high annual average growth rate. In 2015, after four years of stagnation, the Belarusian economy slid into a recession, its first since 1996, and experienced both cyclical and structural recessions. Since 2015, the Belarusian government and the National Bank of Belarus have been giving economic reforms a good chance thanks to gradual but consistent actions aimed at maintaining macroeconomic stability and economic liberalization. It seems that the economic authorities have sustained more transformation efforts during 2015-2018 than in the previous 24 years since 1991.
As the relative welfare level in Belarus is currently 64% compared to the Central and Eastern Europe (CEE) countries average, Belarus needs to build stronger fundaments of sustainable growth by continuing and accelerating the implementation of institutional transformation, primarily by fostering elimination of existing administrative mechanisms of inefficient resource allocation. Based on the experience of the CEE countries’ economic transformation, we highlight five lessons for the purpose of the economic reforms that Belarus still faces today: keeping macroeconomic stability, restructuring and improving the governance of state-owned enterprises, developing the financial market, increasing taxation efficiency, and deepening fiscal decentralization.
Inflation in advanced economies is low by historical standards but there is no threat of deflation. Slower economic growth is caused by supply-side constraints rather than low inflation. Below-the-target inflation does not damage the reputation of central banks. Thus, central banks should not try to bring inflation back to the targeted level of 2%. Rather, they should revise the inflation target downwards and publicly explain the rationale for such a move. Risks to the independence of central banks come from their additional mandates (beyond price stability) and populist politics.
Estonia has Europe’s most transparent tax system (while Poland is second-to-last, in 35th place), and is also known for its pioneering approach to taxation of legal persons’ income. Since 2000, payers of Estonian corporate tax don’t pay tax on their profits as long as they don’t realize them. In principle, this approach should make access to capital easier, spark investment by companies and contribute to faster economic growth. Are these and other positive effects really noticeable in Estonia? Have other countries followed in this country’s footsteps? Would deferment of income tax be possible and beneficial for Poland? How would this affect revenue from tax on corporate profits? Would investors come to see Poland as a tax haven? Does the Estonian system limit tax avoidance and evasion, or actually the opposite? Is such a system fair? Are intermediate solutions possible, which would combine the strengths or limit the weaknesses of the classical and Estonian models of profit tax? These questions are discussed in the mBank-CASE seminar Proceeding no. 163, written by Dmitri Jegorov, deputy general secretary of the Estonian Finance Ministry, who directs the country’s tax and customs policy, Dr. Anna Leszczyłowska of the Poznań University of Economics and Business and Aleksander Łożykowski of the Warsaw School of Economics.
The trade war between the U.S. and China began in March 2018. The American side raised import duties on aluminum and steel from China, which were later extended to other countries, including Canada, Mexico and the EU member states. This drew a negative reaction from those countries and bilateral negotiations with the U.S. In June 2018 America, referring to Section 301 of its 1974 Trade Act, raised tariffs to 25% on 818 groups of products imported from China, arguing that the tariff increase was a response to years of theft of American intellectual property and dishonest trade practices, which has caused the U.S. trade deficit.
Will this trade war mean the collapse of the multilateral trading system and a transition to bilateral relationships? What are the possibilities for increasing tariffs in light of World Trade Organization rules? Can the conflict be resolved using the WTO dispute-resolution mechanism? What are the consequences of the trade war for American consumers and producers, and for suppliers from other countries? How high will tariffs climb as a result of a global trade war? How far can trade volumes and GDP fall if the worst-case scenario comes to pass? Professor Jan J. Michałek and Dr. Przemysław Woźniak give answers to these questions in the mBank-CASE Seminar Proceeding No. 161.
This Report has been prepared for the European Commission, DG TAXUD under contract TAXUD/2017/DE/329, “Study and Reports on the VAT Gap in the EU-28 Member States” and serves as a follow-up to the six reports published between 2013 and 2018.
This Study contains new estimates of the Value Added Tax (VAT) Gap for 2017, as well as updated estimates for 2013-2016. As a novelty in this series of reports, so called “fast VAT Gap estimates” are also presented the year immediately preceding the analysis, namely for 2018. In addition, the study reports the results of the econometric analysis of VAT Gap determinants initiated and initially reported in the 2018 Report (Poniatowski et al., 2018). It also scrutinises the Policy Gap in 2017 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses.
More from CASE Center for Social and Economic Research (20)
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
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Tele-gram
@Pi_vendor_247
Resume
• Real GDP growth slowed down due to problems with access to electricity caused by the destruction of manoeuvrable electricity generation by Russian drones and missiles.
• Exports and imports continued growing due to better logistics through the Ukrainian sea corridor and road. Polish farmers and drivers stopped blocking borders at the end of April.
• In April, both the Tax and Customs Services over-executed the revenue plan. Moreover, the NBU transferred twice the planned profit to the budget.
• The European side approved the Ukraine Plan, which the government adopted to determine indicators for the Ukraine Facility. That approval will allow Ukraine to receive a EUR 1.9 bn loan from the EU in May. At the same time, the EU provided Ukraine with a EUR 1.5 bn loan in April, as the government fulfilled five indicators under the Ukraine Plan.
• The USA has finally approved an aid package for Ukraine, which includes USD 7.8 bn of budget support; however, the conditions and timing of the assistance are still unknown.
• As in March, annual consumer inflation amounted to 3.2% yoy in April.
• At the April monetary policy meeting, the NBU again reduced the key policy rate from 14.5% to 13.5% per annum.
• Over the past four weeks, the hryvnia exchange rate has stabilized in the UAH 39-40 per USD range.
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
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1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
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how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Greek trade a pillar of dynamic economic growth - European Business Review
CASE Network Studies and Analyses 248 - Exchange Rate Regimes and the Real Sector: a Sectoral Analysis of CEE Countries
1. S t u d i a i A n a l i z y
S t u d i e s & A n a l y s e s
C e n t r u m A n a l i z
S p o ł e c z n o – E k o n o m i c z n y c h
C e n t e r f o r S o c i a l
a n d E c o n o m i c R e s e a r c h
2 4 8
Przemek Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Exchange Rate Regimes and the Real Sector:
a Sectoral Analysis of CEE Countries
W a r s a w , J u l y 2 0 0 3
3. Contents
Abstract ..............................................................................................................................5
1. Introduction ....................................................................................................................6
2. Literature review ............................................................................................................7
2.1. Theory....................................................................................................................7
2.2. Models using aggregated output............................................................................8
2.3. Introducing sectoral differentiation .......................................................................10
2.4. Theoretical lessons ..............................................................................................13
2.5. Empirical evidence...............................................................................................14
3. Empirical analysis........................................................................................................15
3.1. Classification of exchange rate systems..............................................................15
3.2. Data description ...................................................................................................16
3.3. Stylised facts – descriptive statistics ....................................................................16
3.4. Methodology and results......................................................................................18
4. Conclusions .................................................................................................................24
References........................................................................................................................26
Appendix I – Classification of exchange rate regimes .................................................29
Appendix II – Data............................................................................................................30
Appendix III – Estimation results ...................................................................................36
4. Studies & Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Przemyslaw Kowalski
Przemyslaw Kowalski is an economist at the OECD Secretariat in Paris. He graduated in
economics from the Universities of Warsaw (Poland) and Sussex (UK) and is a doctoral candidate
at the University of Sussex. His areas of interest include: international trade theory and policy,
investment and international finance.
Wojciech Paczynski
Wojciech Paczynski holds Master degrees in International Economics from the University of
Sussex (1998), Warsaw University's Department of Economics (1999) and Warsaw University's
Department of Mathematics and Computer Science (2000). He is currently participating in a PhD
programme at the University of Dortmund. His research interests concentrate on monetary and
fiscal policy, institutional economics, game theory and political economy of transition. He has been
an economist at CASE since 2000.
Lukasz Rawdanowicz
Lukasz W. Rawdanowicz holds an MA in International Economics from Sussex University (UK) and
an MA in quantitative methods from Warsaw University (Poland). His main area of interest is
applied international macroeconomics. He has dealt with issues related to trade liberalisation,
currency crises propagation, exchange rate misalignments and exchange rate regime choice. His
empirical research focuses primarily on transition economies. He is a co-author of CASE’s
quarterly publications: Polish Economy – Trends, Analyses, Forecasts and Global Economy and
deals with macroeconomic forecasting.
4
5. Studies & Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
5
Abstract
This paper analyses the impact of exchange rate regimes on the real sector. While most
studies in this field have so far concentrated on aggregate variables, we pursue a sectoral
approach distinguishing between the tradable and nontradable sectors. Firstly, we present a
survey of the relevant theoretical and empirical literature. This demonstrates that evaluations of
exchange rate regimes and their impact on the real economy are largely dependant on specific
assumptions concerning, in particular, the parameters of a utility function, the nature of the price
adjustment process and the characteristics of analysed shocks. Secondly, we conduct an empirical
analysis of the behaviour of the tradable and nontradable sectors under different exchange rate
regimes for seven Central and Eastern European countries. We find no firm evidence of a
differential impact of given exchange rate regimes on the dynamics of output and prices in the two
sectors. We proffer a conceptual and technical interpretation of this.
6. Studies & Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
1. Introduction
6
The choice of an exchange rate regime is one of the key economic policy choices. After the
wave of financial crises in the 1990s, the introduction of the euro and in view of euro-zone
enlargement by new members from Central and Eastern Europe (CEE), this choice is not only an
academic bone of contention, but also a real policy dilemma. The decision on the exchange rate
system is affected by many considerations, ranging from economic arguments related to the
stabilisation properties of regimes, existing institutional frameworks, trade and investment
concerns, to political arguments pertaining to political preferences in given international contexts.
On of the most intriguing aspects of choosing an exchange rate regime is its impact on the real
economy (Stockman, 1999; Harris, 2002). Half a century after Friedman (1953) formulated his
hypothesis of a flexible exchange rate as a facilitator of adjustments in an economy characterised
by nominal rigidities, there is still much controversy concerning the optimal choice of regimes for
particular countries or groups of countries. After the collapse of the Bretton-Woods architecture of
fixed exchange rates in 1973, real exchange rates became more volatile. At the same time, such
observable volatility did not result in any directly observable changes in other real variables.
Dornbusch’s (1976) infamous overshooting model demonstrated that while unanticipated monetary
contractions lead to temporary declines in output, the extent of exchange rate volatility under a
floating exchange rate regime may be much larger than that of any underlying shocks. However,
the lack of real effects in terms of increased real exchange rate volatility in the longer term
remained a puzzle. “That productive and allocative effects of the exchange rate system are virtually
undetectable is generally viewed as surprising, particularly in light of evidence that real exchange
rates (defined as the relative price of overall bundles of goods in two countries) vary substantially
more under a system of floating rates than pegged ones” (Stockman, 1999).
Theoretical and empirical investigations into exchange rate regimes to date have dealt
primarily with aggregate variables and have paid little attention to sectoral issues. This is surprising
given that the distinction between tradables and nontradables has important implications for
thinking across a whole range of issues in international economics. While this distinction emerges
naturally in discussions of real exchange rates, the question of the differential impact of exchange
rate regimes on the relative performance of sectors of the economy producing tradables and
nontradables has been neglected. This is an important shortcoming of the literature given that
nontradables comprise a predominant share of most economies. “Aggregate” approaches assume
that national output is traded internationally and hence, implicitly, focus only on tradables. In our
view, analysis at a disaggregated level provides new insights into the debate on the choice of
exchange rate regimes. Given the close relationship between nominal and real exchange rates
even in the medium term (see e.g. De Grauwe, 1997), it is probable that the choice of exchange
rate arrangement will impact upon the allocation of resources between the two sectors (tradables
vs. nontradables) and, in general, upon their growth rates. In view of the higher labour intensity
7. Studies & Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
being usually characteristic of nontradables this may have not only economic but also political
effects (Fischer, 2001).
In dealing with exchange rate regime issues the problem of a clear-cut classification emerges,
especially for regimes in the ‘floating’ corner: pure free-float regimes are not that common and
many countries prefer managed floats. As Calvo and Reinhart (2002) have suggested, many
economies exhibit ‘fear of floating’ and in practice use interest rate and intervention policies whose
effect is to steer the exchange rates. At the other extreme, fixed pegs are more transparent given
their institutional frameworks in the form of either currency boards or dollarisation. The problem of
exchange rate regime classification, as such, boils down to a comparison of de facto and de jure
exchange rate policies.
Against this background, this paper provides a detailed critical survey of the theoretical and
empirical literature dealing with the sectoral dimension of the exchange rate regime debate, as well
as a new empirical contribution to the debate. We investigate the ex post impact of exchange rate
regimes on tradables and nontradables in a sample of selected Central and Eastern Europe
transition economies. We demonstrate that the pegged regimes in our sample have failed to curb
the volatility of nominal and real effective exchange rates. We find no firm evidence of a differential
impact of exchange rate regimes on the dynamics of output and prices in tradables and
nontradables. We suggest various conceptual and technical interpretations for this.
The remainder of the paper is structured as follows. In Section 2, we review the main
theoretical contributions on the choice of exchange rate regime. This section also focuses on
empirical evidence for the differential impact of exchange rate regimes on the real economy. In
Section 3, we outline our empirical methodology and results. Conclusions are presented in
Section 4.
7
2. Literature review
2.1. Theory
The discussion about choice of exchange rate regime dates back to Friedman (1953), who
suggested that in the case of nominal price rigidities a floating exchange rate could alleviate
adjustments to shocks. Friedman’s notion of an insulating role played by floating exchange rates in
circumstances of foreign demand shocks was developed further in the 1960s. Mundell (1960), for
example, proposed a simple analytical framework demonstrating that the relative effectiveness of
an exchange rate regime in helping a country adjust to shocks depends in principle on government
policy rules, capital mobility and the speed of price adjustment to excessive or deficient demand.
Numerous subsequent contributions focused on concrete evidence of the impact of regime
choices. Despite these efforts, as Stockman (2000) points out, “economists lack strong evidence
on how exchange rate systems affect the economic variables that people care about, such as long-run
growth, avoidance of dislocations from business cycles, and so on”.
8. Studies & Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
8
At a high level of generality, an evaluation of an exchange rate regime is possible when
specific criteria and an economic model are defined. With regards to evaluation criteria, most of the
literature focuses on measures of stability of macroeconomic variables, such as aggregate output,
inflation, real exchange rates, etc. relative to given ‘trend’ values. Definitions of such trends are
rarely explained, despite the fact that their specific character is a key factor in determining final
results (see e.g. Woodford (2002)).
In optimising models based on microfoundations, welfare evaluation of alternative exchange
rate regimes and monetary policies tends to be explicit and depends on the specification of the
utility function (usually involving specification of preferences in household consumption and
leisure). The specification of the model also affects optimality conditions. For instance, Tille (2002)
shows that the widely asserted benefits of a floating exchange rate regime in terms of its shock
absorbing properties, are severely diminished if one includes incomplete sectoral specialisation
(i.e. firms from one sector can be located in various countries) and sector-specific shocks (as
opposed to commonly assumed country-specific shocks). Finally, other specific assumptions
regarding the functioning of the world economy are vital for the predictions. In particular,
assumptions on how exchange rate fluctuations are transmitted into prices (exchange rate pass-through)
turn out to be critical for the results (see e.g. Lane and Ganelli (2002)).
Current theoretical models of exchange regime choice analyse primarily only two alternatives:
fixed vs. floating. This is motivated by difficulties in modelling so-called ‘intermediate’ or ‘hybrid’
regimes, but is also closely related to actual trends in exchange rate regime patterns. The last
decade has witnessed a general trend away from intermediate exchange rate regimes, especially
in the aftermath of the ERM and emerging markets crises in the 1990s. Fischer (2001)
demonstrated that the number of countries with ‘corner’ exchange regimes has increased
significantly since 1990, and that free floaters are now preponderant. Fischer’s explanation of this
finding was that for countries open to capital flows, soft pegs (i.e. intermediate solutions) do not
provide a viable option in the longer run due to their vulnerability to currency crises.
2.2. Models using aggregated output
The traditional workhorses of policy analysis: the Mundell-Fleming and AS/AD models, by
assumption, treat output as a homogenous good which is produced, consumed, and traded
internationally. Their results can, therefore, be cautiously interpreted as indicative of the impact of
exchange rate regimes on tradables. This caution is necessary, however, since the inclusion of
nontradables may change the properties of the models. Any explicit analysis of exchange rate
regimes in these models is constrained to assessment of their ability to stabilise output and
inflation around some natural level under a given structure of shocks. Deviations of output (and
possibly also prices and exchange rates) from their natural paths are considered undesirable and
are thought of as a proxy for costs associated with the adoption of a particular exchange rate
regime.
9. Studies & Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
A simple illustrative example of such analysis is provided in Calvo (1999a). His basic version of
9
the Mundell-Fleming model can be reduced to the following equations:
y = a * e + u , a > 0 (1)
m = y + v (2)
where y denotes output, e the nominal exchange rate, m money (all in logarithms) and u and v
stochastic disturbances. Domestic prices are assumed to be constant and are normalized to 1
(thus zero in logarithm). Equation (1) represents an IS curve, and (2) an LM curve. In both
equations interest rate effects are included in stochastic terms and elasticity of money in relation to
output in (2) is set to unity.
A fixed exchange rate regime (Fix) is defined as one in which var(e) = 0, and a floating regime
(Flex) by the condition var(m) = 01. Thus, under Fix var(y) = var(u) (as var(e) = 0), whereas under
Flex var(y) = var(v) and var(e) = (var(v) + var(u) + 2cov(u,v)) / a2.
If we identify u with real shocks and v with nominal shocks, we arrive at the standard
conclusion that, provided the loss function is proportional to the variance of output, a fixed
exchange rate regime is superior (or inferior) to a floating exchange rate regime, if the volatility of
nominal shocks is larger (or smaller) than the volatility of real shocks. It could be argued, however,
that an excessive variation of the real exchange rate (stemming purely from nominal exchange rate
volatility, due to the fixed price assumption in this model) is also potentially harmful and, thus, that
variance of the exchange rate should also enter the loss function. This inclusion improves the
attractiveness of the fixed exchange rate regime, which increases with the correlation between v
and u (i.e. between real and nominal shocks)2.
The model can be also modified by allowing for a full and immediate pass-through from the
exchange rate to the price of domestic output (full indexation). Under these conditions, equations
(1) and (2) can be rewritten as
y = u (3)
m = y + e + v (4)
indicating that variance of output is equal to the variance of real shock u, independent of the
exchange rate regime, i.e. exchange rate regimes are equivalent in terms of the loss function
proportional to the variance of output3.
1 Note, that a floating regime is defined by a money stock target. In contrast, it is a form of inflation targeting that has
become the most commonly used system in floating exchange rates in the real world. Dehejia and Rowe (2001)
elaborate on this point.
2 Calvo (1999a) argues that the discussed correlation coefficient is likely to be positive.
3 Since volatility of the nominal exchange rate does not feed into the real rate, inclusion of this factor in the loss
function is not justifiable.
10. Studies & Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
2.3. Introducing sectoral differentiation
10
While the aggregate Mundell-Fleming and AS/AD models do not explicitly tackle adjustments
in tradables and nontradables, they do provide predictions about short-term changes in income
levels and real exchange rate changes, as illustrated above. It can be argued that the analysis of
underlying shocks and resulting adjustments in real exchange rates and incomes is only a step
away from analysis of adjustments in tradables and nontradables.
Assuming equal income elasticity of demand in the two sectors4 and imperfect substitutability
between tradables and nontradables, we can make some approximate predictions about the likely
relative exposure of sectors producing tradables and nontradables to different shocks under
floating and fixed exchange rate regimes. If, as a result of a given shock, only income changes,
both sectors should experience proportionate changes in demand. In this case, conclusions related
to the desirability of a given exchange rate regime drawn from aggregate analysis can be extended
to the sectoral dimension. However, if income shifts coincide with exchange rate changes, the two
sectors will be affected differently.
This line of reasoning, coupled with the Calvo (1999a) model described above, confirms this
intuitive result: under a fixed exchange rate regime demand in both sectors will be affected
proportionally [var(y)=var(u); var(e)=0]. The same finding is obtained with the full exchange rate
pass-through. Under a floating exchange rate regime with less than full pass-through, however,
var(y) = var(v) and var(e) = (var(v) + var(u) + 2cov(u,v) / a2), implying that tradables and
nontradables will be affected proportionately only under the condition that var(v) + var(u) = -
2cov(u,v), which is a special case of perfect negative correlation of shocks to IS and LM curves
and cannot be presumed a priori.
These results from the very general variation of the IS/LM model in Calvo (1999a) can be
extended to more traditional versions of this model in which shocks to fiscal policy, foreign income,
foreign price level and interest rates can be analysed explicitly if one identifies real exchange rate
(in)stability with the relative (in)stability of sectors. This idea has been implemented by Dehejia and
Rowe (2001), who considered real exchange rate stability as one of the criteria for an assessment
of monetary regimes.
Dehejia and Rowe (2001) propose a version of the flexible price Mundell-Fleming model with
stochastic components in aggregate demand and supply and compare the variance of aggregate
output and of the expected real exchange rate and the expected interest rate, all relative to their
natural rates under different monetary rules. They consider the variance of the expected real
exchange rate as a proxy for stabilisation of tradables and the variance of the expected real
interest rate as an indicator of stability in the interest rate sensitive sector. Natural rates are defined
as those that would prevail if no price surprises occurred (i.e., when the actual price level meets
4 If a representative consumer makes the choice between tradables and nontradables according to the Cobb-
Douglas type of utility function, shares of expenditure devoted to tradables and nontradables will be constant, and the
unit increase in income, ceteris paribus, will increase demand in both sectors by the same amount.
11. Studies & Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
expectations that have been formed in previous periods). The main finding of this study is that a
policy of price level targeting is most successful in stabilisation of output and expected real
exchange rates and interest rates relative to natural levels. Such a policy would appear, however,
to be a purely theoretical concept given that its implementation would imply the need for repeated
central bank activity to lower the price level (deflation). In the framework developed, price level
targeting means that a bank commits to reversing shocks to the price level that push it above (or
below) a declared level. The ranking between the two actual policy options analysed – fixed
exchange rate and inflation targeting – is parameter dependent.
While analysis of the Mundell-Fleming type of model provides a simple framework for thinking
about aggregate and sectoral stability it also leaves many questions unanswered. Because the
supply and demand sides are not modelled explicitly, we cannot account for either the effects of
the relative size of tradable and nontradable sectors or the size of the domestic tradable sector in
comparison to the foreign tradable sector5. Both of these factors clearly determine the relevance of
real exchange rate stability as a criterion for the assessment of adopted exchange rate regimes.
Discussion on the relevance of the size and openness of economies when choosing exchange rate
regime brings us back to the influential work of McKinnon (1963). He argues that flexible exchange
rates are less effective in checking the external balance and are more damaging to internal price
level stability the more open the economy is. This proposition is confirmed in a very different
setting by Calvo and Kumhof (2002), who developed and calibrated a general equilibrium model
with detailed microfoundations. Adopting the highly plausible assumptions of greater labour
intensity and greater price rigidity in the nontradable sector, the benefits of greater exchange rate
flexibility are reported to be higher for relatively closed economies6. This follows from the
observation that in a relatively closed economy (i.e. one with a larger nontradables sector),
exchange rate adjustment to foreign real shocks impacts on the labour market in nontradables.
The extent of this impact increases with the size of nontradables sector, as well as when nominal
rigidities in this sector are greater than or equal to those in the rest of the economy.
The new open economy macromodels, with explicitly specified microfoundations and general
equilibrium closures, seem better suited to deal with sectoral issues. Thus, it might come as a
surprise that relatively few models in the NOEM tradition include disaggregation of output into
tradables and nontradables. Obstfeld and Rogoff (1996) introduce nontradables in their small open
economy model. Their choice of the utility function, with consumption of tradables and
nontradables entering additively, implies that agents choose consumption of tradables
independently of nontradables’ production and consumption. Thus, in the absence of shocks
affecting productivity of tradables, the current account is always balanced. In this formulation, there
are no long-term effects of money shocks on the level of production. Only the price level in both
sectors is proportionally affected. In the short run, the price stickiness in the nontradable sector
5 The general equilibrium impact of e.g. expansion of the tradable and nontradable sector on the economy-wide
11
wage will depend not only on proportional expansion of their demands but also on the initial sizes of the two sectors.
6 This could also be viewed as giving some support to the Optimal Currency Area test of trade openness.
12. Studies & Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
(prices in the tradable sector are fully flexible) means that nontradable output is demand
determined, e.g. it rises in response to an unanticipated permanent money shock.
12
Devereux and Lane (2001) propose a small open economy model allowing for, among other
effects, a different degree of exchange rate pass-through in import prices (where export prices
adjust instantaneously). The model is calibrated by setting parameter values using various results
found in the literature and data on East Asian emerging economies. Two types of shocks (changes
in the world interest rates and terms of trade) are considered under alternative monetary/exchange
rate regimes. The simulation, based on linear approximation, is used to study the response of
some model variables to shocks. In particular, impulse response graphs for output of tradables and
nontradables are presented. The impact of interest rates shock (increases in foreign interest rates)
on sectoral output is similar under the peg and CPI inflation targeting if exchange rate movements
are immediately passed on to import prices. Allowing for a delayed pass-through from exchange
rates to import prices changes the results. Under such conditions, the inflation targeting rule makes
tradables’ and nontradables’ output less volatile (i.e. the initial expansion in the tradables sector
and fall in the nontradables sector is smaller). Analysis of terms of trade shocks leads to similar
conclusions. The authors note that in their formulation a negative terms-of-trade shock is
essentially equivalent to a negative productivity shock in the export sector (the decline in return on
investment). Overall, the peg and the inflation targeting regimes produce similar outcomes for
tradable and nontradable output (and other variables) via immediate pass-through from exchange
rates to import prices. The delayed pass-through results in the superiority of the inflation targeting
framework as far as stabilisation properties of both aggregated and nontradables’ output are
concerned. However, this comes at the price of destabilising tradables’ output slightly more than
under the peg.
Finally, it is also worth mentioning another category of models that yield interesting results on
sectoral differentiation under alternative exchange rate regimes. Vartiainen (2002) introduces a
model of an open economy with two sectors – one producing tradables and the other producing
nontradables and sheltered from international competition. All workers are assumed to be
organised in trade unions that co-ordinate their wage claims within sectors. Two unions
representing tradable and nontradable sectors bargain over their wages each aiming at maximising
the sum of wages within the sector above the reservation wage, taking into account the labour
demand function. Under such conditions, in equilibrium, there are differences in relative prices,
output shares and wages in the sectors, depending on the exchange rate regime. The fixed
exchange rate regime induces lower prices for tradables and lower relative wages in the tradable
sector. This, however, does not indicate that a floating regime is preferred by the tradable sector,
since the impact on employment can also go in the opposite direction, i.e. a fixed exchange rate
regime can, while dampening relative wages, boost employment in the tradables sector.
13. Studies & Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
13
2.4. Theoretical lessons
The above survey illustrates the lack of clearly defined relationships between the choice of the
exchange rate regime and its sectoral implications. The advances in modelling techniques and the
development of optimising models in the NOEM tradition did not substantially change the insights
provided by the Mundell-Fleming type of models. Specifications with respect to the parameters of
the utility function, the nature of the price adjustment process and characteristics of analysed
shocks ultimately determine the model’s predictions. For instance, the predictions of Devereux and
Lane (2001) are broadly in line with the findings of the model sketched by Calvo (1999a). The
immediate pass-through of exchange rate movements to prices makes free float and fixed regimes
similar in terms of their stabilisation properties.
Also, the explicit inclusion of tradables and nontradables in selected models does not seem to
result in any strong predictions on regimes’ characteristics with respect to the performance of the
tradable and nontradable sectors. Some models are able to illustrate the trade-off between
stabilisation of total output and stabilisation of output components (tradables in Devereux and Lane
(2001)). This point, however, can be also demonstrated using the Mundell-Fleming framework.
Calvo (1999a) rightly observes that the theoretical work on exchange rate regimes appears to
make one important simplification, which leads to certain reservations. Namely, it is commonly
assumed that random shocks hitting a particular economy are not related to the exchange rate
regime that has been adopted. However, given the way in which financial markets operate, it
seems plausible to assume that at least some shocks (originating in capital accounts) are likely to
be dependant on the choice of exchange rate regime. For instance, Calvo (1999b) argues that
dollarization may lower capital account volatility.
At this point, the relative robustness of theoretical findings from various categories of models
should be brought to attention. While the NOEM clearly have an advantage over Mundell-Fleming
models in that they allow for an explicit welfare analysis (rather than the use of ad hoc criteria
focusing primarily on output and inflation variance), it is not clear whether they are capable of
producing more valuable and realistic policy recommendations. Given the still early stages of
development of NOEM models and the sensitivity of their results to particular assumptions,
claiming their superiority for policy recommendations might appear premature7. In fact, no single
theory (or a set of theories) seems unquestionable in this respect. In this context, Taylor (1993)
noted that “...policy evaluation results cannot be obtained from pure theoretical considerations.
They depend on the empirical nature of the economic relations and on the size and correlation of
the shocks to these relations”.
7 See Lane (2001) and Lane and Ganelli (2002) for a comprehensive overview of NOEM models’ strengths and
deficiencies.
14. Studies & Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
2.5. Empirical evidence
14
Having surveyed theoretical developments, we now turn to discussion of available empirical
evidence on the impact of the exchange rate regime on the relative performance of the tradable
and nontradable sectors. The non-neutrality of exchange rate regimes has been well documented
in empirical work. This, however, mostly pertains to the impact of regimes on the volatility of real
and nominal exchange rates. The standard fact one repeatedly comes across in the literature is
that floating regimes tend to induce higher volatility of exchange rates. Mussa (1986) and Flood
and Rose (1995) document this for OECD countries and Broda (2002) provides results for
developing countries. At the same time, no corresponding significant impact on other key
macroeconomic variables has been observed. Baxter and Stockman (1989) and later Flood and
Rose (1995) credibly proved this assertion. A theoretical framework allowing for (a partial)
explanation of this puzzle is provided by Dedola and Leduc (2002). Assuming differential speeds of
price adjustments between the two sectors, Dedola and Leduc were able to closely mimic the
characteristics of the actual data for G7 countries during the Bretton Woods era and after the
demise of this system.
Hau (2002) investigated the empirical relationship between openness to trade (measured by
the size of the tradable sector) and real exchange rate volatility (measured by standard deviations
over 3-year periods). The study is motivated by the theoretical predictions from Hau (2000) and
Obstfeld and Rogoff (2000) suggesting that more open economies should exhibit less volatile real
exchange rates since imported goods provide a channel for a quick adjustment in the domestic
aggregate price level in case of shocks occurrence. The postulated relationship is indeed found to
be statistically significant in two samples; one consisting of 23 OECD countries and the other
consisting of 48 countries. Interestingly, from the perspective pursued in this paper, the inclusion of
the dummy variable for the fixed exchange rate commitment visibly reduced the effect of openness
on real effective exchange rate volatility. This is broadly in line with findings from other studies that
this volatility tends to be reduced under fixed exchange rate regimes.
Broda (2002) assessed the different consequences of macroeconomic shocks depending on
the exchange rate regime. Semi-structural panel vector autoregression methodology is used to
analyse the responses of real GDP, real exchange rates and prices to negative terms of trade
shocks for 75 developing countries in the post-Bretton Woods period. The estimated impulse
response functions for the case of the fixed exchange rate regime picture a moderate, 3-year
decline in real GDP following a 10% permanent fall in terms of trade. No such statistically
significant response is found for the floating exchange rate. The real exchange rate experiences a
prolonged depreciation (primarily due to nominal depreciation as prices increase) in the floating
regime and no such effect is observed for countries with fixed exchange rates. This finding is
consistent with Friedman’s (1953) arguments.
A shortcoming of Broda’s analysis is that it concentrates only on one very specific shock and
thus does not provide general insights concerning the performance of alternative exchange rate
15. Studies & Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
regimes. To our knowledge, there has to date been no empirical investigation concerning the
volatility of output and prices at sectoral levels under alternative exchange rate regimes. This is the
subject of the empirical exercise presented in the remainder of the paper.
15
3. Empirical analysis
In the empirical part of the paper we focus on selected countries in CEE. There are several
reasons why we chose the transition economies of CEE. Firstly, CEE countries exhibit diversity of
exchange rate regimes. At the same time they are characterised by many common features, such
as a similar political and economic legacy, EU accession process, trade patterns, economic
structure, etc. These factors make controlling, the region-specific effects, less important than would
be the case in large panels of more diversified countries. Secondly, the choice was also partly
determined by availability of sectoral data needed for the study. Thirdly, there exists relatively less
empirical research on transition economies than on industrialised countries.
3.1. Classification of exchange rate systems
Prior to testing any differences among exchange rate regimes it is necessary to classify the
observed exchange rate regimes. This is not a straight-forward exercise and several approaches
are possible. One possibility is to follow a de jure classification based on the public declarations
made by each countries’ authorities. Such information is also provided, for instance, by the IMF
(1999), which distinguishes eight categories, ranging from the adoption of another currency
(dollarisation, euroisation) to an independent float. However, it is widely known that de facto
regimes often differ from officially declared regimes (Calvo and Reinhart, 2002).
The differences between declarations and reality have stimulated efforts to find algorithmic
methods for classifying regimes based on available data (usual parameters include nominal
exchange rates, international reserves and interest rates). Levy-Yeyati and Sturzenegger (2002)
undertook such an approach and have provided a classification of exchange rate regimes for a
large set of countries. One should also, however, acknowledge that such methods have drawbacks
and in particular cases may fail to provide realistic descriptions. Given the relatively small and
specific sample of countries used in our research, combined with the need for classification on a
quarterly basis, we propose our own classification that comprises three exchange rate regimes
(fixed exchange rate, intermediate and floating exchange rate regime). This classification utilises
both official declarations made by monetary authorities (an overview can be found in de Souza,
2002) and data from Levy-Yeyati and Sturzenegger (2002). In our opinion, such an approach
provides a good description of the de facto exchange rate regimes pursued by the group of CEE
countries in the period 1994-2002. The detailed classification can be found in Appendix I.
16. Studies & Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
3.2. Data description
16
For the purpose of empirical analyses a quarterly database for seven CEE countries has been
constructed, including data on the Czech Republic, Estonia, Hungry, Lithuania, Poland, Slovenia
and the Slovak Republic and spanning from the first quarter of 1993 to the last quarter of 20028.
The economic indicators covered include: value added in constant prices in tradables and
nontradables; the corresponding price indices of tradables and nontradables; industrial production;
real and nominal effective exchange rates; domestic interest rates; as well as foreign demand
proxied by GDP in the EU and the index of world commodity prices. All variables, except interest
rates, were transformed to normalised constant-base indices (100=base period), seasonally
adjusted using the Eurostat (2002) ARIMA X-12 procedure and transformed into logarithms.
Detailed information on data sources and transformation, as well as a broader discussion on data-related
issues, can be found in Appendix II.
3.3. Stylised facts – descriptive statistics
One of the well established stylised facts about industrialised countries points to a significant
increase in the volatility of nominal and real exchange rates in the post-Bretton Wood period that
was not, however, accompanied by increased volatility in other macroeconomic variables (see
Section 2.5) Thus, prior to model estimations, descriptive statistics of several macroeconomic
variables under the pegged and floating exchange rate regimes are analysed with a view to
investigating potentially similar patterns in our database. The results are presented in Table 1.
The first, puzzling, observation from Table 1 is that while the real effective exchange rates
seem to be more volatile under the floating exchange rate regime, the nominal effective exchange
rates tend to exhibit somewhat higher (at least not lower) volatility under the fixed exchange rate
regime. This appears to contradict what might have been expected intuitively as well as evidence
from industrialised economies. The tests for equality of variance9 in the case of nominal effective
exchange rates give mixed results, whereas in the case of real effective exchange rates the null
hypothesis is rejected. The explanation of high volatility and high average growth rate in NEER for
fixed exchange rates is that it is primarily driven by exchange rate dynamics vis-à-vis the Russian
rouble. The Russian currency and inflation were extremely volatile until 2000. For Estonia and
Lithuania, two countries that maintained fixed regimes over the entire period under investigation,
the shares of foreign trade with Russia, and in turn the shares of the rouble in their currency
baskets10, were high – at least until 1998. In the case of countries with floating exchange rate
regime this effect was less acute due to smaller trade exposure. An interesting lesson that
emerges from this analysis is that pegged exchange rates do not shelter a country from NEER (or
8 The length of particular time series varies significantly among countries and variables.
9 Test statistics (F-test, Barlett, Levine and Brown-Forsythe tests) are not reported but available upon request.
10 REER and NEER are trade weighted indices.
17. Studies & Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
REER) volatility if the country trades with economies using currencies that are volatile against the
domestic country’s anchor currency (e.g. the US dollar and the euro).
Table 1. Average growth rates and volatilities under the peg and floating
17
VA VA_T VA_NT NEER REER PT PNT
Average growth under
peg (%)
0.5 0.6 0.6 0.9 0.6 0.7 1.0
Average growth under
float (%)
0.3 0.2 0.4 0.2 0.5 0.3 0.5
Standard deviation
under peg (%)
0.76 1.72 0.80 1.66 1.14 1.36 1.40
Standard deviation
under float (%) 0.32 1.38 0.60 1.24 1.45 1.05 0.72
Ratio of standard
0.42 0.8 0.75 0.75 1.28 0.77 0.52
deviations (float/peg)
Source: Authors’ calculations.
Note: Growth rates in percentages, changes quarter-on-quarter. Country-period observations were classified as fixed or
floating exchange rate regime according to Table A. 1. For the description of abbreviations see Appendix II.
In terms of comparison of statistical properties of output and prices, simple measures of
average growth and volatility can be misleading since time-specific and country-specific factors
may bias the results. The evidence based on these measures is, however, that fixed exchange rate
regimes were characterized by faster growth in output and inflation, as well as by higher volatility of
these variables. The latter effect can be explained to some extent by higher average growth rates
among fixers. Indeed, when volatilities of sectoral output and prices growth relative to aggregate
output and price growth were calculated, differences between regimes vanished (see Table 2).
With the exemption of nontradable prices, where tests give mixed results, in all other cases the null
hypothesis of variance equality between exchange rate regimes cannot be rejected at reasonable
significance levels. This result is similar to that for industrialised countries where exchange regimes
do not seem to affect the behaviour of macroeconomic variables other than the exchange rate. Our
results suggest that this might also be the case at the sectoral level.
Table 2. Volatility of sectoral output and prices relative to aggregate output and price under
the peg and floating
T output NT output T prices NT prices
Fixed exchange rate regime 1.5 0.7 1.0 0.8
Floating exchange rate regime 1.3 0.5 1.0 0.5
Source: Authors’ calculations.
Note: The table reports standard deviations for variables defined as a difference between quarterly growth rates (in
percent) of total value added (value added deflator) in tradables (T) and nontradables (NT) and growth rates of
aggregate value added (deflators).
18. Studies & Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
3.4. Methodology and results
18
The task of empirical testing for differences in the dynamics of tradable and nontradable output
between different exchange rate regimes can be divided into two parts. One refers to finding the
appropriate framework for modelling the behaviour of output in the two sectors, and the second
refers to testing the differences among exchange rate regimes in this framework. As far as the
former issue is concerned, the natural approach is to employ a VAR methodology. VAR models are
useful for investigation of historical data dynamics in an economy and do not require a formal
specification of the underlying theoretical model. In principle, this approach boils down to a choice
of appropriate variables and length of lags (Enders, 1995). In the exchange rate regime context,
the VAR framework was recently utilised by Broda (2002) in his quest to detect differences in
reactions of macroeconomic variables to terms-of-trade shocks between exchange rate regimes.
As far as testing of differences among exchange rate regimes is concerned, panel techniques
are natural. Pooling data on countries with one exchange rate regime allows one to gain insights on
common trends in this regime, whereas pooling all regimes together facilitates testing of differences
among regimes. Nevertheless, formal tests of the differences are often not feasible and hence not
attempted. For instance, Broda’s (2002) focus is on comparing the impulse response functions rather
than deriving formal tests. This simplified approach arises primarily from problems with combining
VAR analysis and panel data techniques which complicate the designing of formal tests.
The empirical part of this paper sets off with an approach similar to Broda (2002). As the
analysis in Section 2 indicates, under specific assumptions, differences among exchange rate
regimes in the short-run can be expected due to varying degrees of accommodation to shocks.
Thus, the derivation of impulse response functions in the VAR framework is an appropriate
approach. In particular, the objective is an assessment of differences in output response in
tradables and nontradables to various shocks hitting the economy. For this purpose a VAR system
capable of incorporating a wide spectrum of shocks has been constructed. The following is the
reduced form of the model:
A(L)* Yt = t (5)
where Yt is a vector of system variables (comprising output in tradables and nontradables, the real
effective exchange rate, relative prices of nontradables and tradables, the interest rate, GDP
growth in the EU, and world commodity prices), A(L) is lag polynomial and t is a vector of error
terms.
The choice of the variables in (5) is designed so as to incorporate the most important
indicators determining supply and demand of goods and services in open economies. The
objective is to draw a general picture consistent with basic macro models. Variables used in the
model include output in tradables and nontradables (proxied by value added in industry and value
added in services sectors), corresponding relative prices, real effective exchange rates and
19. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
nominal interest rates (for more detailed discussion see Appendix II). Inclusion of the EU’s GDP
and commodity prices facilitates control over potentially important exogenous shocks. Commodity
prices are treated as a proxy for terms of trade11. In our view, this set of variables enables
investigation of a rich structure of relationships.
An important and debated issue in the VAR methodology is whether stationary variables
should be used. This, at a high level of generality, boils down to the trade-off between less
efficiency against less information. For example, Sims (1980) argues that variables should not be
differentiated even if they contain unit roots. This recommendation has been followed in many
empirical studies – see for instance Ramaswamy and Slok (1998). On the other hand, other
authors suggest that if variables are neither non-stationary nor cointegrated, a VAR system should
be estimated in first differences. However, if variables are cointegrated through r cointegrating
relationships, the system should be modelled as a VAR in the r stationary combinations and (n-r)
differences of I(1) variables (Maddala and Kim, 1998).
A visual inspection of the data as well as standard time series and panel unit root tests (i.e.
augmented Dickey-Fuller and Pedroni (1999)) indicate that most of the considered variables are
nonstationary. Given the focus on testing differences in reactions to shocks between sectors and
exchange rate regimes in this exercise, the VAR models are estimated in first differences. We are
concerned more about efficiency than potential loss of information. Estimations in levels with
imposed wrong long-term restrictions could be equally undesirable for the results. In the light of
many reservations with regard to unit root and cointegration tests this would be very likely. The unit
root tests suffer from low power and cointegration analysis in a model containing both I(0) and I(1)
variables is problematic (Maddala and Kim, 1998). Moreover, as Campbell and Perron (1991) have
argued, distinguishing a process that exhibits cointegration from this that does not, could prove
very difficult.
The VAR model as defined in system (5) is estimated separately for each exchange rate
regime according to the classification provided in Appendix I. Given the short time series for
countries within each exchange rate regime, the condition of homogeneity of coefficients between
countries is imposed (i.e. it is assumed that country-specific effects do not affect the short-term
dynamics under a particular exchange rate regime)12. This is admittedly a restrictive assumption. It
could not, however, be avoided given the nature of available data. This consideration led us to
estimate VAR models with two lags13.
In order to obtain the structural form of system (5) and to draw impulse response functions we
applied the Choleski decomposition method, which provides a minimal set of necessary
11 Data on the terms of trade was not readily available for all countries in the sample. However, the dynamics of the
19
commodity prices well mimics the dynamics of terms of trade in countries where such data was available.
12 Equations with varying constant coefficients have been also estimated.
13 There is no commonly agreed method of selecting the lag length in VAR models. Usually it is recommended to
use between one to three full years of observations as a too small lag order may hinder capturing the true data dynamics
and relationships among variables. Given the number of observations and regressors in our models this was not feasible.
Thus, we perceive the two-lag structure as the only feasible trade-off between securing sufficient degrees of freedom and
misspecification of the model.
20. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
restrictions. As this method is sensitive to the ordering of variables in a system, the ordering was
carefully chosen so as to reflect the expected precedence among variables.
20
The estimation of system (5) for each exchange rate regime rendered results that are generally
in line with theoretical expectations. However, impulse response functions are not statistically
significant. The results are sensitive to the inclusion of observations for the Slovak Republic, which
were partly classified as a floating exchange rate regime and partly as a fixed one. In the case of
the Slovak Republic, data quality problems were expected: data on value added in tradables were
subject to unusually high volatility and the existence of outliers. After the exclusion of this country
from the sample, the VAR analysis proved to be less sensitive to model specification. We
experimented with various model compositions and definitions of the variables listed under the
specification of system (5) (see also Appendix II).
The lack of statistical significance was judged based on standard error bands and general poor
fit (see Appendix III for examples of impulse response functions). Most coefficients were not
significantly different from zero, a block exogeneity test could not be rejected and R2 was usually
very low. In judging the significance of variables, the potentially severe problem of multicollinearity
had to be taken into account. Given the lack of significant results, no robust inferences could be
made either about output dynamics of tradables and nontradables or about differences between
regimes.
The lack of statistically significant results may have many sources. Firstly, data quality and
short times series are a problem. In general, value added data in many instances exhibited
surprisingly high quarterly volatility, even after seasonal adjustment, and in some instances there
were reasons to expect significant outliers. In addition, the large number of variables in the
specified VAR systems relative to time series length did not allow testing for higher lag length,
which could have had important bearings on the results. There is also a more general problem of
short-term dynamics in VAR. In practice, it is often found that unrestricted VAR models yield very
erratic estimates. In addition, VAR models are in general known for their overparametrisation and
low precision of coefficient estimates (Maddala and Kim, 1998). Finally, we cannot preclude that
variables were cointegrated for some model specifications and the estimation in differences
ignored important information.
This last consideration led us to investigation of short-term adjustments in the error correction
framework which allows for possible long-run relationships. For this purpose we employed the
pooled mean group (PMG) estimation procedure as proposed by Pesaran et al. (1999). This
method allows for heterogeneous short-run dynamics, which implies relaxing a restrictive
assumption adopted in the VAR exercise. Besides, as Pesaran et al. (1999) note, it is usually more
reasonable to expect long-term relationships to be similar across countries than in the case of
short-run relationships. This may stem from common forcing factors such as budget and solvency
constraints, technology and arbitrage.
The PMG estimator for heterogeneous panels allows one to estimate autoregressive
distributed lag (ARDL) models as well as their error correction representations with an explicit
21. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
estimation of long-run relationships. For each group in a panel, an ECM model is estimated with
homogeneity restriction imposed on long-run coefficients, whereas short-run coefficients are
allowed to vary and are averaged across groups. Thus, a PMG estimator can be viewed as an
intermediate approach between the mean group estimator (the average of results from separate
estimates for each group) and fixed/random effects panel models which allow only an intercept to
vary across groups - all other coefficients and error variances are constrained to be homogenous
(Pesaran et al., 1999). It is often found that a single-country estimation gives insignificant and
economically implausible results, but mean group or pooled estimates of long-run coefficients tend
to be sensible. This could be attributable to the fact that group-specific estimates are biased due to
sample-specific omitted variables or measurement errors that are correlated with the regressors
(Pesaran et al., 1999).
In estimating error correction terms we focused primarily on the relationships between output
in tradables and nontradables, exchange rates and relative prices. Different specifications for each
exchange rate regime were tested separately. A PMG is a single-equation approach (as opposed
to the multivariate VAR approach adopted beforehand) and thus normalisations with regard to both
tradables and nontradables were tested. As in the VAR approach, we experimented with various
definitions of variables. In the case of tradables, we also included EU GDP as a proxy for foreign
demand. Specifications of the EU’s GDP as a long-run forcing variable (but without imposing
homogeneity among countries) and as a lagged exogenous variables were tested.
As Pesaran et al. (1999) demonstrated, the PMG estimator is usually robust to outliers and the
choice of lag order. The latter is identified based on one information criterion. We tested models
with maximum two lags and used the Schwarz-Bayes criterion (SBC), which determined the order
of lags for the ARDL model in each country.
Generally, the statistical properties of the results obtained from PMG estimations proved to be
sensitive to definitions of variables and model specification14. Observations for the Slovak Republic
were excluded from estimations. In the case of tradables, the models with reasonable statistical
properties that could be compared between exchange rate regimes suggest that there are small
discrepancies in the speed of adjustment to long-run equilibrium (the error correction term) – see
Table 3. It is noteworthy that, overall, the adjustment seems to be fast. This seems to be consistent
with the relatively short lives of the impulse response functions in the estimated VAR models (see
Appendix III).
14 Estimations were performed using the GAUSS procedure written by Pesaran et al. (1999)
21
http://www.econ.cam.ac.uk/faculty/pesaran/jasa.exe
22. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Table 3. Results of PMG estimations for tradables
22
Floating exchange rate regime Fixed exchange rate regime
Dependent variable: T (value
added in tradables) Coefficients t-statistic Coefficients t-statistic
Model 1
NT -0.220 -0.5 0.984 6.8
REER -0.455 -12.7 -0.382 -4.8
GDP_EU* 2.466 11.0 1.239 3.6
Phi -0.675 -2.1 -0.661 -1.9
Model 2
NT 1.804 6.3 0.807 3.2
REER -0.305 -10.2 -0.304 -3.7
Phi -0.599 -1.5 -0.478 -4.6
Model 3
GDP 1.581 6.6 0.815 7.3
REER -0.403 -5.8 -0.179 -2.8
GDP_EU* 0.346 2.1 1.176 3.8
Phi -0.746 -2.9 -0.682 -2.1
Source: Authors’ calculations.
Notes: Detailed models’ specifications and results are given in Appendix III. ‘*’ denotes long-run coefficients that were
unrestricted across countries. Phi is the error correction term.
In the case of nontradables, results are less robust in terms of statistical properties and more
sensitive to alternative definitions of variables. Thus, inference concerning nontradables dynamics
or possible differences between exchange rate regimes is less compelling. For instance, in the
model, for which results are presented in Table 4, signs of relative price elasticities (prices of
nontradables to prices of tradables) are different under floating and fixed exchange rate regimes.
This could be indicative of results being driven by particular events (such as crises) or outliers in
the data.
Table 4. Results of PMG estimations for nontradables
Dependent variable: NT
(value added in nontradables) Floating exchange rate regime Fixed exchange rate regime
Coefficients t-statistic Coefficients t-statistic
Model 1
GDP 0.908 6.7 1.031 29.0
RP2 -0.318 -2.1 0.174 3.2
Phi -0.296 -1.3 -0.487 -5.6
Source: Authors’ calculations.
Notes: Detailed models’ specifications and results are given in Appendix III. Phi is the error correction term.
23. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
Overall, the presented empirical analyses do not identify any significant differences in impact
of exchange rate regimes on the short-run dynamics of tradables and nontradables. However,
these findings must be treated with caution given the conceptual and technical problems with their
derivation. Apart from the problem of short-time series and the limitations of a particular
econometric estimation technique, two important conceptual considerations are worth
emphasising.
Firstly, the results could be affected by the fact that the considered panel of country-regime
observations was unbalanced. This may have led to biased results in cases where common group
effects were not accounted for in equations. In addition, in some countries (for instance the Czech
Republic, Poland, Hungary – see Appendix I) frequent changes in exchange rate regimes relative
to the sample span lead to reservations about the possibility of detecting differences among
exchange rate regimes. It is reasonable to suppose that there might have been expectations of
regime change before it actually occurred. On the other hand, economic agents or economic
relationships adjust to changes in exchange rate regimes not instantaneously but with some time
lag. The importance of such behavioural arguments for the case of corner regimes in the
considered sample is somewhat reduced, since periods of fixed and floating exchange rates were
usually separated by a period of an intermediate regime. In this context, results for countries with
fixed exchange rate regimes could be more robust: Estonia and Lithuania maintained their
currency board arrangements during the whole period under investigation.
Figure 1. NEER in Lithuania, 1995-2001 (January 1995=1)
3,5
3,0
2,5
2,0
1,5
1,0
0,5
09/1996
01/1997
05/1997
09/1997
01/1998
09/1998
01/1999
05/1999
05/2000
09/2000
12
10
8
6
4
2
Source: Authors’ calculations based on Bank of Lithuania data.
Notes: NEER (LHS axis) – nominal effective exchange rate (trade weighted – all trade partners); NEER EU (LHS axis) –
NEER calculated versus the EU; NEER CIS (RHS axis) – NEER calculated versus the CIS; The litas was pegged
to the US dollar throughout the whole period.
Secondly, in the investigated sample there is no significant difference in the NEER stability
between fixed and floating regimes. Technically, the fixed regime in our sample reflects only the
fact that the domestic currency was pegged to a single foreign currency, thus not precluding the
23
0,0
01/1995
05/1995
09/1995
01/1996
05/1996
05/1998
09/1999
01/2000
01/2001
05/2001
09/2001
01/2002
0
NEER EU NEER NEER CIS (rhs axis)
24. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
volatility against other foreign currencies – including those of important trading partners. This is the
case with Lithuania. During the period January 1994 – February 2002, the litas was pegged to the
US dollar. However, Lithuania trades mostly with the EU, the FSU and other Baltic countries.
Figure 1 depicts developments in the country’s NEER versus the EU, the FSU and all trading
partners together. The implications of this commonly overlooked fact may be far reaching. In
contrast to the usually considered theoretical two-country or small open economy models, in reality
existing fixed exchange rate regimes do not necessarily insulate against exchange rate volatility.
The distinction between pure float and pure fix is blurred, with implications for the capability of
empirical work to capture the differential characteristics between regimes. Clearly, there are other
mechanisms that are likely to determine the influence of exchange rate regimes on domestic
economic activities. In particular macroeconomic policy design and institutional framework play a
major role in macroeconomic development and the stability of any given economic situation.
Nevertheless, it is extremely difficult to identify relationships of this sort empirically.
4. Conclusions
24
This paper investigated the impact of exchange rate systems on the real economy from a
sectoral perspective. The majority of theoretical and empirical investigations to date on exchange
rate regimes have dealt primarily with aggregate variables and paid little attention to sectoral
issues. This is surprising given the important distinction between tradables and nontradables and
the consequences of this on theoretical models as well as the functioning of economies.
The detailed critical survey of both theoretical and empirical literature dealing with the sectoral
dimension of the exchange rate regime debate demonstrates that there is no commonly accepted
theory of exchange rate systems. Predictions of existing models depend crucially on specific
assumptions concerning in particular the parameters of the utility function, the nature of the price
adjustment process, characteristics of analysed shocks and openness of economies. This applies,
in particular, to NOEM models, which are viewed as superior to Mundell-Fleming type of models
and as more appropriate for explicit sectoral analysis.
The VAR and PMG estimations conducted for selected CEE countries did not identify robust
evidence of differences between exchange rate systems in terms of reactions to shocks for the
tradable and nontradable sectors. We interpret this finding as a confirmation of results for
developed countries, where the real effects of choosing exchange rate regimes are hardly
detectable at the aggregate level. This is interesting since it is expected that if real economy
differences between exchange rate regimes exist they should be more pronounced at a
disaggregated level.
The lack of strong results demonstrating real economy differences between exchange rate
regimes may also be due to technical and conceptual difficulties encountered in this type of
research. Among the technical difficulties, we should mention the short-time series, the small
number of countries in the group and limitations of econometric techniques in applied research. As
25. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
far as conceptual problems are concerned, exchange rate regime classification, frequent changes
in exchange rate systems and lack of differences in exchange rate volatility among different
regimes should be pointed out.
This paper demonstrates that the countries under investigation that followed pegged regimes
suffered from equally high (or even higher) volatility of effective nominal exchange rates than
countries with floating regimes. Pegging a domestic currency to a single foreign currency does not
necessarily insulate against exchange rate variability versus other foreign currencies. This finding
in our country group contrasts with the theoretical two-country or small open economy models and
could be a major obstacle in detecting empirically differences among exchange rate regimes.
In terms of further research, a closer and a more explicit empirical investigation of the
underlying assumptions of different theoretical models on the exchange rate regime would be
desirable. This could strengthen the link between empirical and theoretical research and contribute
to more valuable policy recommendations. Testing theories on exchange rate regimes is only
appropriate if the underlying assumptions are met. In addition, a deeper analysis of the importance
of various shocks could also be interesting in this respect.
As far as policy conclusions are concerned, the lack of any serious impact of the exchange
rate regime on the real economy suggests that the focus of the debate on optimal choice of
exchange rate systems should concentrate on consistency of the monetary policy framework
instead of restating standard arguments in favour of either fixing or floating exchange rate regimes.
This debate should also take into account existing institutional arrangements and credibility issues.
It is evident that exchange rate regime fit, be it peg or floating, to the overall macroeconomic
framework matters for countries’ development and stability prospects.
25
26. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
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Devereux, Michael B. and Philip R. Lane (2001), ‘Exchange Rates and Monetary Policy in
Emerging Market Economies’, mimeo, preliminary version, June
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Economy, Vol. 84 (6), pp. 1161-1176
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Seminar on Exchange Rate Regimes: Hard Peg or Free Floating?, IMF Headquarters,
Washington, D.C., January
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Harris, Richard G. (2002), ‘Asymmetric Shocks and Productivity Dynamics in a Core-Periphery
27
Integration’, mimeo, Simon Fraser University
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28. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Taylor, John (1993), Macroeconomic Policy in a World Economy: From Economic Design to
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Practical Operation, N.Y: Norton
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http://www.princeton.edu/~woodford
30. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Appendix II – Data
30
Our quarterly database covers seven Central and East European countries: the Czech
Republic (CZE), Estonia (EST), Hungary (HUN), Lithuania (LIT), Poland (POL), Slovenia (SLO),
and the Slovak Republic (SLK). It spans from the first quarter of 1993 to the last quarter of 2002.
The length of time series differs significantly among countries and particular variables (see below).
The first data-related challenge of our research deals with definition of tradables and
nontradables and measures of their dynamics. As Obstfeld and Rogoff (1996) noted, the usual
identification of tradables (i.e. goods that can be traded internationally) with goods, and
nontradables with services is too crude. However, in practice when dealing with aggregated data in
macroeconomic analyses no good solution to this problem seems to exist. One general and
interpretable measure of the dynamics in these sectors is output. In the case of tradables it can be
measured in terms of the industrial production index, however, no such measure exists for
aggregated services. Therefore, we decided to use constant-prices value added indices for
specified sectors. We assumed industry to be the tradable sector, whereas construction, market
and nonmarket services represent the nontradables sector. It might be more appropriate to classify
some subsections of industry (like electricity, gas, and water supply) as nontradables and vice
versa for some services (e.g. part of transportation can and indeed is traded internationally).
However, data disaggregation did not allow for such division in all countries. In our classification,
we decided to exclude agriculture, as we believe the production of agricultural goods is driven
more by weather conditions and specific production cycles than by macroeconomic variables
analysed in our models.
Given our value added measures of output in tradables and nontradables we used
corresponding value added deflators as price indices (PT and PNT). However, in two cases (for
Slovenia and Hungary) deflators could not be calculated due to lack of current-price data and they
were proxied by consumer prices (as nontradables prices) and producer prices (as tradables prices).
The real effective exchange rates (REER) (i.e. exchange rates versus currencies of main
trading partners weighted by trade shares) reported by the IMF use the CPI as a relative price
measure. As consumer prices comprise a presumably large share of nontradables prices, such a
measure is not a perfect indicator for countries’ competitive position. In our view, a nominal
exchange rate deflated by tradables prices would be a preferred indicator. Therefore, we
calculated modified REER indices. These were constructed based on nominal effective exchange
rates for each country and domestic and foreign prices for tradables. Foreign prices were proxied
by a value added deflator in the euro-zone15 (RER2) or producer prices in the EU (RER1).
As for interest rates, we decided to focus on domestic rates (IR). In most cases, this was the 3-
month inter-bank interest rate, however, where data was not available, proxies of the average of
lending and deposits rates were used. The real interest rates were deflated with consumer prices
(RIR2). In our view, domestic interest rates are most relevant for determining supply and demand
15 No value added deflator was available for the EU in the tradable sector.
31. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
for tradables and nontradables in CEECs, as the access to foreign capital markets is limited and
the link between foreign and domestic interest rates in reality is far from simple. Moreover, the link
between domestic and foreign exchange rates differs between exchange rate regimes.
To take account for foreign demand we used constant-prices GDP in the five big EU
economies16 (GDP_EU5). Given the high shares of trade with the EU of all countries in our sample
(see Table A. 2) this is a fairly reasonable proxy.
Table A. 2. The EU shares in foreign trade, 1999-2002 (% of total exports and imports)
Czech
Republic Estonia Hungary Lithuania Poland Slovenia Slovakia
31
1999 67 68 70 49 67 68 55
2000 66 69 66 46 65 66 54
2001 66 62 66 47 65 65 55
2002 65 62 65 47 65 64 55
Source: Calculations based on Eurostat data.
For most countries, data on terms of trade was not readily available so we decided to proxy
terms of trade by the IMF commodity price index (COMM). Given the assumption that the countries
in our sample are price-takers in international markets (cf. e.g. Broda (2002)), this variable should
well reflect the changes in terms of trade of individual countries. An analysis performed for Poland,
where data were available, indeed indicated a high negative correlation between terms of trade
and the commodity price index.
All variables, apart from interest rates, were transformed to normalised constant-base indices
(100=base period), seasonally adjusted (using ARIMA X-12 procedure of Eurostat (2002)) and
transformed to logarithms. Detailed information on data sources and transformation as well as
broader discussion on data issues are provided below.
List of all variables (_xxx is a country identifier):
VA_xxx - Value added
T_xxx - Valued added in tradables (only industry)
NT_xxx - Valued added in nontradables (construction, market and non-market services)
NEER_xxx - Nominal effective exchange rate (increase – appreciation)
REER_xxx - Real effective exchange rate (increase – appreciation)
RIR2_xxx - Real interest rate
IR_xxx - Nominal interest rate
CPI_xxx - Consumer price index
PPI_xxx - Producer price index
DEF_xxx - Value added deflator
PT_xxx - Deflator for value added in tradables
16 No data for the entire data span was available for the EU.
32. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
PNT_xxx - Deflator for value added in nontradables
RP1_xxx - Relative domestic prices: nontradables/tradables in terms of CPI and PPI
RP2_xxx - Relative domestic prices: nontradables/tradables in terms of corresponding VA
32
deflators
RER1_xxx - NEER deflated with domestic and EU tradables prices in terms of the PPI
(PPI_xxx * NEER_xxx / PPI_EU5) increase – appreciation
RER2_xxx - NEER deflated with domestic and euro-zone tradables prices in terms of VA
deflators (PT_xxx * NEER_xxx / PT_EUR) increase – appreciation
COMM - commodity price index (all commodities), IMF
Country identifiers (_xxx)
CZE – the Czech Republic, EST – Estonia, HUN – Hungry, LIT – Lithuania, POL – Poland, SLO –
Slovenia, SLK – the Slovak Republic, EU5 – the EU, EUR – the euro zone.
Sources and definitions
Czech Republic (CZE)
Variable Period Source/definition/notes
VA, T, NT 1Q94-4Q02 Czech Statistical Office
DEF, PT, PNT 1Q94-4Q02 Czech Statistical Office
CPI / PPI 1Q93-4Q02 IFS – IMF
RP1 1Q93-4Q02 Authors’ calculations based on official data
RP2 1Q94-4Q02 Authors’ calculations based on official data
NEER / REER 1Q93-4Q02 IFS – IMF; increase = appreciation
RER1 / RER2 1Q93-4Q02 Authors’ calculations based on official data
IR 1Q93-4Q02 Czech National Bank (CNB); 3M PIBOR
RIR2 1Q94-4Q02 CNB; 3M PIBOR deflated with the annual change in the CPI
33. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
33
Estonia (EST)
Variable Period Source/definition/notes
VA, T, NT 1Q93-4Q02 Statistical Office of Estonia
DEF, PT, PNT 1Q93-4Q02 Statistical Office of Estonia
CPI / PPI 1Q93-4Q02 IFS – IMF
RP1 1Q93-4Q02 Authors’ calculations based on official data
RP2 1Q93-4Q02 Authors’ calculations based on official data
NEER / REER 1Q93-4Q02 Bank of Estonia; increase = appreciation
RER1 / RER2 1Q93-4Q02 Authors’ calculations based on official data
IR 2Q93-4Q02 IFS – IMF; average of deposit and lending rates
RIR2 1Q94-4Q02 IFS – IMF; average of deposit and lending rates deflated with the
annual change in the CPI
Hungary (HUN)
Variable Period Source/definition/notes
VA, T, NT 1Q95-4Q02 Hungarian Central Statistical Office
CPI / PPI 1Q93-4Q02 IFS – IMF
RP1 1Q93-4Q02 Authors’ calculations based on official data
NEER / REER 1Q93-4Q02 IFS – IMF, increase = appreciation
RER1 1Q93-4Q02 Authors’ calculations based on official data
IR 1Q93-4Q02 IFS – IMF; average of deposit and lending rates
RIR2 1Q94-4Q02 IFS – IMF; average of deposit and lending rates deflated with the
annual change in the CPI
Lithuania (LIT)
Variable Period Source/definition/notes
VA, T, NT 1Q94-4Q02 Department of Statistics to the Government of the Republic of
Lithuania
DEF, PT, PNT 1Q94-4Q02 Department of Statistics to the Government of the Republic of
Lithuania
CPI / PPI 1Q93-4Q02 IFS – IMF
RP1 1Q93-4Q02 Authors’ calculations based on official data
RP2 1Q94-4Q02 Authors’ calculations based on official data
NEER / REER 3Q93-4Q02 Bank of Lithuania; (increase = appreciation)
RER1 3Q93-4Q02 Authors’ calculations based on official data
RER2 1Q94-4Q02 Authors’ calculations based on official data
IR 1Q94-4Q02 IFS – IMF; money market interest rate
RIR2 1Q94-4Q02 IFS – IMF; money market interest rate deflated with the annual
change in the CPI
34. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Poland (POL)
Variable Period Source/definition/notes
VA, T, NT 1Q95-4Q02 Polish Central Statistical Office (CSO);
DEF, PT, PNT 1Q95-4Q02 Central Statistical Office (CSO)
CPI / PPI 1Q93-4Q02 CSO
RP1 1Q93-4Q02 Authors’ calculations based on official data
RP2 1Q95-4Q02 Authors’ calculations based on official data
NEER / REER 1Q93-4Q02 IFS – IMF; increase = appreciation
RER1 1Q93-4Q02 Authors’ calculations based on official data
RER2 1Q95-4Q02 Authors’ calculations based on official data
IR 1Q93-4Q02 National Bank of Poland (NBP); 3M WIBOR
RIR2 1Q94-4Q02 NBP; 3M WIBOR (deflated with the annual change in the CPI)
Slovak Republic (SLK)
Variable Period Source/definition/notes
VA, T, NT 1Q94-4Q02 Statistical Office of the Slovak Republic
DEF, PT, PNT 1Q94-4Q02 Statistical Office of the Slovak Republic
CPI / PPI 1Q93-4Q02 IFS – IMF
RP1 1Q93-4Q02 Authors’ calculations based on official data
RP2 1Q94-4Q02 Authors’ calculations based on official data
NEER / REER 1Q93-4Q02 IFS – IMF; (increase = appreciation)
RER1 1Q93-4Q02 Authors’ calculations based on official data
RER2 1Q94-4Q02 Authors’ calculations based on official data
IR 1Q93-4Q02 IFS – IMF; average of deposit and lending rates
RIR2 1Q94-4Q02 IFS – IMF; average of deposit and lending rates deflated with the
34
annual change in the CPI
Slovenia (SLO)
Variable Period Source/definition/notes
VA, T, NT 1Q95-4Q02 Statistical Office of the Republic of Slovenia
CPI / PPI 1Q93-4Q02 IFS – IMF
RP1 1Q93-4Q02 Authors’ calculations based on official data
NEER / REER 1Q93-4Q02 Central Bank of Slovenia; (increase = appreciation)
RER1 1Q93-4Q02 Authors’ calculations based on official data
IR 1Q93-4Q02 IFS – IMF; money market interest rates
RIR2 1Q94-4Q02 IFS – IMF; money market interest rates deflated with the annual
change in the CPI
35. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
35
Other
Variable Period Source/definition/notes
PT_EUR, PN_ EUR 1Q93-4Q02 ECB, Monthly Bulletin
CPI_EU5, PPI_EU5 1Q93-4Q02 Main Economic Indicators, OECD
COMM 1Q93-4Q02 IFS – IMF
36. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Appendix III – Estimation results
1. Impulse response functions
36
The impulse response functions were derived for VAR models as specified below with two
lags. Confidence bands are based on Monte Carlo simulations with 1000 repetitions. R1 stands for
floating exchange rate regime, R3 for fixed exchange rate regime, C is a constant.
Figure A. 1. Impulse response function for Specification 1
Floating exchange rate: VAR = D(R1_T) D(R1_NT) D(R1_REER) D(R1_GDP_EU) C
Fixed exchange rate regime): VAR = D(R3_T) D(R1_NT) D(R3_REER) D(R3_GDP_EU) C
Response to Cholesky One S.D. Innovations ± 2 S.E.
.006
.004
.002
.000
-.002
-.004
-.006
-.008
Response of D(R1_T) to D(R1_NT)
1 2 3 4 5 6 7 8 9 10 11 12
.006
.004
.002
.000
-.002
-.004
-.006
-.008
Response of D(R1_T) to D(R1_REER)
1 2 3 4 5 6 7 8 9 10 11 12
.006
.004
.002
.000
-.002
-.004
-.006
-.008
Response of D(R1_T) to D(R1_GDP_EU)
1 2 3 4 5 6 7 8 9 10 11 12
Response to Cholesky One S.D. Innovations ± 2 S.E.
.012
.008
.004
.000
-.004
-.008
Response of D(R3_T) to D(R1_NT)
1 2 3 4 5 6 7 8 9 10 11 12
.012
.008
.004
.000
-.004
-.008
Response of D(R3_T) to D(R3_REER)
1 2 3 4 5 6 7 8 9 10 11 12
.012
.008
.004
.000
-.004
-.008
Response of D(R3_T) to D(R3_GDP_EU)
1 2 3 4 5 6 7 8 9 10 11 12
37. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
37
Figure A. 2. Impulse response function for Specification 2
Floating exchange rate regime: VAR = D(R1_NT) D(R1_GDP) D(R1_RP2) C
Fixed exchange rate regime: VAR = D(R3_NT) D(R3_GDP) D(R3_RP2) C
Response to Cholesky One S.D. Innovations ± 2 S.E.
.005
.004
.003
.002
.001
.000
-.001
-.002
-.003
Response of D(R3_NT) to D(R3_GDP)
1 2 3 4 5 6 7 8 9 10 11 12
.005
.004
.003
.002
.001
.000
-.001
-.002
-.003
Response of D(R3_NT) to D(R3_RP2)
1 2 3 4 5 6 7 8 9 10 11 12
Response to Cholesky One S.D. Innovations ± 2 S.E.
.006
.004
.002
.000
-.002
-.004
-.006
Response of D(R1_NT) to D(R1_GDP)
1 2 3 4 5 6 7 8 9 10 11 12
.006
.004
.002
.000
-.002
-.004
-.006
Response of D(R1_NT) to D(R1_RP2)
1 2 3 4 5 6 7 8 9 10 11 12
38. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
2. PMG results
38
The results of PMG estimations were derived based on the following parameters:
· SBC (Schwarz) has been used to select the lag orders for each group.
· The static fixed effects OLS estimates have been used as initial estimate(s) of the
long-run parameter(s) for the pooled maximum likelihood estimation.
· The number of included groups is N = 2.
The Newton-Raphson method was used to derive PMG estimates.
For the floating exchange rate regime: Group 1 is Poland and Group 2 the Czech Republic.
For the fixed exchange rate regime: Group 1 is Estonia and Group 2 Lithuania.
39. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
39
Model 1
Flexible exchange rate Fixed exchange rate
The number of time periods by groups are:
17 20
The number of time periods by groups are:
38 30
Orders of lags in the ARDL model: Orders of lags in the ARDL model:
Group 1 : 0 2 2 1 Group 1 : 1 1 0 0
Group 2 : 1 0 0 0 Group 2 : 0 1 1 1
Computations converged after 4 iterations. Computations converged after 5 iterations.
Dependent variable: T Dependent variable: T
Coef. St. Er. t-ratio Coef. St. Er. t-ratio
Long-Run Coefficients Restricted to be the Same
Across all Groups
Long-Run Coefficients Restricted to be the Same
Across all Groups
NT -0.220 0.415 -0.530 NT 0.984 0.144 6.833
REER -0.455 0.036 -12.655 REER -0.382 0.079 -4.821
Unrestricted Long-Run Coefficients Unrestricted Long-Run Coefficients
YEU 2.466 0.223 11.045 YEU 1.239 0.34 3.643
Error Correction Coefficients Error Correction Coefficients
Phi -0.675 0.325 -2.081 Phi -0.661 0.339 -1.947
Short-Run Coefficients Short-Run Coefficients
NT -0.149 0.071 -2.081 NT 0.650 0.334 1.947
REER -0.307 0.148 -2.081 REER -0.252 0.130 -1.947
YEU 1.738 0.951 1.827 YEU 0.934 0.645 1.448
dT(-1) 0.000 +DEN +DEN dT(-1) 0.000 +DEN +DEN
dNT 0.316 0.316 1.000 dNT 0.248 0.887 0.279
dNT(-1) 0.910 0.910 1.000 dNT(-1) 0.000 +DEN +DEN
dREER 0.178 0.178 1.000 dREER 0.222 0.222 1.000
dREER(-1 0.142 0.142 1.000 dREER(-1) 0.000 +DEN +DEN
dYEU -1.393 1.393 -1.000 dYEU -2.967 2.967 -1.000
dYEU(-1) 0.000 +DEN +DEN dYEU(-1) 0.000 +DEN +DEN
Inpt -1.281 0.869 -1.474 Inpt -1.340 1.010 -1.326
40. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Model 2
40
Flexible exchange rate Fixed exchange rate
The number of time periods by groups are:
17 20
The number of time periods by groups are:
38 30
Orders of lags in the ARDL model: Orders of lags in the ARDL model:
Group 1 : 0 1 2 Group 1 : 1 1 0 0
Group 2 : 2 0 0 Group 2 : 0 1 1 1
Computations converged after 14 iterations. Computations converged after 5 iterations.
Dependent variable: T Dependent variable: T
Coef. St. Er. t-ratio Coef. St. Er. t-ratio
Long-Run Coefficients Long-Run Coefficients
NT 1.804 0.285 6.323 NT 0.807 0.250 3.230
REER -0.305 0.030 -10.158 REER -0.304 0.082 -3.685
Error Correction Coefficients Error Correction Coefficients
Phi -0.599 0.401 -1.493 Phi -0.478 0.105 -4.570
-Run Coefficients Short-Run Coefficients
1.080 0.724 1.493 NT 0.386 0.084 4.570
REER 0.183 0.122 -1.493 REER -0.145 0.032 -4.570
dT(-1) 0241 0.241 1.000 dT(-1) 0.000 +DEN +DEN
dNT -0. 0.979 -1.000 dNT 0.562 0.562 1.000
dNT(-1) 0.000 DEN +DEN dNT(-1) 0.000 +DEN +DEN
dREER 0.178 0. 1.000 dREER 0.000 +DEN +DEN
dREER(-1) 0.143 0.143 .000 dREER(-1) 0.000 +DEN +DEN
YEU_1 -0.036 0.036 -.000 YEU_1 0.667 0.277 2.404
C -0.490 0.300 -.633 C -0.850 0.435 -1.952
41. Studies Analyses CASE No. 248 – Exchange Rate Regimes and the Real Sector….
41
Model 3
Flexible exchange rate Fixed exchange rate
T number of time periods by groups are:
1 18
The number of time periods by groups are:
37 29
Orders of lags in the ARDL model: Orders of lags in the ARDL model:
Gro 1 : 2 0 0 0 Group 1 : 1 1 0 0
Gro 2 : 0 2 0 0 Group 2 : 0 0 0 2
Com converged after 5 iterations. Computations converged after 4 iterations.
Dependent variable: T Dependent variable: T
Coef. St. Er. t-ratio Coef. St. Er. t-ratio
Long-Run Coefficients Long-Run Coefficients
GDP 1.581 0.240 6.575 GDP 0.815 0.112 7.280
REER -0.403 0.070 -5.776 REER -0.179 0.063 -2.839
Unrestricted Long-Run Coefficients Unrestricted Long-Run Coefficients
YEU 0.346 0.164 2.111 YEU 1.176 0.312 3.774
Error Correction Coefficients Error Correction Coefficients
Phi -0.746 0.254 -2.934 Phi -0.682 0.318 -2.147
Short-Run Coefficients Short-Run Coefficients
GDP 1.179 0.402 2.934 GDP 0.556 0.259 2.147
REER -0.301 0.102 -2.934 REER -0.122 0.057 -2.147
YEU 0.216 0.034 6.308 YEU 0.901 0.586 1.538
dT(-1) 0.032 0.032 1.000 dT(-1) 0.000 +DEN +DEN
dGDP -0.611 0.611 -1.000 dGDP 0.553 0.553 1.000
dGDP(-1) -0.276 0.276 -1.000 dGDP(-1) 0.000 +DEN +DEN
dREER 0.000 +DEN +DEN dREER 0.000 +DEN +DEN
dREER(-1 0.000 +DEN +DEN dREER(-1 0.000 +DEN +DEN
dYEU 0.000 +DEN +DEN dYEU -1.919 1.919 -1.000
dYEU(-1) 0.000 +DEN +DEN dYEU(-1) -2.564 2.564 -1.000
Inpt -0.678 0.017 -40.666 Inpt -1.299 0.929 -1.398
42. Studies Analyses CASE No. 248 – Przemyslaw Kowalski, Wojciech Paczynski, Lukasz Rawdanowicz
Model 4
42
Flexible exchange rate Fixed exchange rate
The number of time periods by groups are:
17 18
The number of time periods by groups are:
37 29
Orders of lags in the ARDL model: Orders of lags in the ARDL model:
Group 1 : 2 2 0 Group 1 : 2 0 2
Group 2 : 1 0 0 Group 2 : 1 0 1
Computations converged after 5 iterations. Computations converged after 4 iterations.
Dependent variable: NT Dependent variable: NT
Coef. St. Er. t-ratio Coef. St. Er. t-ratio
Long-Run Coefficients Long-Run Coefficients
GDP 0.908 0.136 6.696 GDP 1.031 0.036 28.961
RP2 -0.318 0.152 -2.097 RP2 0.174 0.054 3.217
Error Correction Coefficients Error Correction Coefficients
Phi -0.296 0.228 -1.296 Phi -0.487 0.087 -5.570
Short-Run Coefficients Short-Run Coefficients
GDP 0.269 0.207 1.296 GDP 0.502 0.090 5.570
RP2 -0.094 0.073 -1.296 RP2 0.084 0.015 5.570
dNT(-1) -0.187 0.187 -1.000 dNT(-1) -0.122 0.122 -1.000
dGDP 0.270 0.270 1.000 dGDP 0.000 +DEN +DEN
dGDP(-1) -0.042 0.042 -1.000 dGDP(-1) 0.000 +DEN +DEN
dRP2 0.000 +DEN +DEN dRP2 -0.170 0.080 -2.120
dRP2(-1) 0.000 +DEN +DEN dRP2(-1) -0.032 0.032 -1.000
Inpt 0.247 0.188 1.311 Inpt -0.190 0.035 -5.480