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
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
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
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
The paper proposes two econometric models of inflation for Azerbaijan: one based on monthly data and eclectic, another based on quarterly data and takes into account disequilibrium at the money market. Inflation regression based on monthly data showed that consumer prices dynamics is explained by money growth (the more money, the higher the inflation), exchange rate behaviour (appreciation drives disinflation), commodities price dynamics (“imported” inflation) and administrative changes in regulated prices. For the quarterly model, nominal money demand equation (with inflation, real non-oil GDP and nominal interest rate on foreign currency deposits as predictors) and money supply equation were estimated, and error-correction mechanism from money demand equation was included into inflation equation. It is shown that disequilibrium at the money market (supply higher than demand) drives inflation together with money supply growth and nominal exchange rate depreciation and administrative changes in prices. No cost-push variables appeared to be significant in this equation specification. Both models give similar inflation projections, but sudden changes in money demand (2012) lead to significant differences between the projections. It is shown that money is the most important inflation determinant that explains up to 97.8% of CPI growth between 2012 and 2015, and that in order to keep inflation under control the Central Bank of Azerbaijan should link money supply to real non-oil GDP growth.
Authored by: Alexander Chubrik, Przemyslaw Wozniak, Gulnar Hajiyeva
Published in 2012
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
The aim of the paper is to analyze theoretically and empirically the likely impact of the reduction in exchange rate uncertainty, due to the EMU accession, on the intensity of FDI inflow into candidate countries. Theoretical models give an ambiguous picture of how exchange rate uncertainty and volatility affect direction and magnitude of FDI inflows. The main contribution of this paper is in finding that exchange rate uncertainty and volatility may negatively influence the decision to locate investment in transition and accession countries. Nominal exchange rate uncertainty seems to particularly hamper FDI inflows in accession countries. The key finding of this paper is that euro adoption is likely to exert a positive influence on FDI inflows in accession countries.
Authored by: Michal Brzozowski
Published in 2003
Yannick Lucotte. Is There a Competition-Stability Trade-Off in European Banking?Eesti Pank
Yannick Lucotte
PSB Paris School of Business, France
(with A. Leroy, Laboratoire d’Economie d’Orléans, France)
Open Seminar of Eesti Pank
Bank of Estonia, Tallinn, April 12, 2016
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
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
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
The paper proposes two econometric models of inflation for Azerbaijan: one based on monthly data and eclectic, another based on quarterly data and takes into account disequilibrium at the money market. Inflation regression based on monthly data showed that consumer prices dynamics is explained by money growth (the more money, the higher the inflation), exchange rate behaviour (appreciation drives disinflation), commodities price dynamics (“imported” inflation) and administrative changes in regulated prices. For the quarterly model, nominal money demand equation (with inflation, real non-oil GDP and nominal interest rate on foreign currency deposits as predictors) and money supply equation were estimated, and error-correction mechanism from money demand equation was included into inflation equation. It is shown that disequilibrium at the money market (supply higher than demand) drives inflation together with money supply growth and nominal exchange rate depreciation and administrative changes in prices. No cost-push variables appeared to be significant in this equation specification. Both models give similar inflation projections, but sudden changes in money demand (2012) lead to significant differences between the projections. It is shown that money is the most important inflation determinant that explains up to 97.8% of CPI growth between 2012 and 2015, and that in order to keep inflation under control the Central Bank of Azerbaijan should link money supply to real non-oil GDP growth.
Authored by: Alexander Chubrik, Przemyslaw Wozniak, Gulnar Hajiyeva
Published in 2012
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
The aim of the paper is to analyze theoretically and empirically the likely impact of the reduction in exchange rate uncertainty, due to the EMU accession, on the intensity of FDI inflow into candidate countries. Theoretical models give an ambiguous picture of how exchange rate uncertainty and volatility affect direction and magnitude of FDI inflows. The main contribution of this paper is in finding that exchange rate uncertainty and volatility may negatively influence the decision to locate investment in transition and accession countries. Nominal exchange rate uncertainty seems to particularly hamper FDI inflows in accession countries. The key finding of this paper is that euro adoption is likely to exert a positive influence on FDI inflows in accession countries.
Authored by: Michal Brzozowski
Published in 2003
Yannick Lucotte. Is There a Competition-Stability Trade-Off in European Banking?Eesti Pank
Yannick Lucotte
PSB Paris School of Business, France
(with A. Leroy, Laboratoire d’Economie d’Orléans, France)
Open Seminar of Eesti Pank
Bank of Estonia, Tallinn, April 12, 2016
The aim of this study is to undertake an up-to-date assessment of market power in Central and Eastern European banking markets and explore how the global financial crisis has affected market power and what has been the impact of foreign ownership. Three main results emerge. First, while there is some convergence in country-level market power during the pre-crisis period, the onset of the global crisis has put an end to this process. Second, bank-level market power appears to vary significantly with respect to ownership characteristics. Third, asset quality and capitalization affect differently the margins in the pre-crisis and crisis periods. While in the pre-crisis period the impacts are similar for all banks regardless of ownership status, in the crisis period non-performing loans have a negative effect and capitalization a positive effect only for domestically-owned banks.
Authored by: Georgios Efthyvoulou, Canan Yildirim
Published in 2013
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 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
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
Estimation of Net Interest Margin Determinants of the Deposit Banks in Turkey...inventionjournals
Banks, which are the irreplaceable intermediaries of the financial system, are financial institutions that significantly contributeto economic development. The basiccriterion that indicates the efficiency of the intermediation activities of banks is the net interest margins. These costs are assumed to be high for developing countries such as Turkey. The degree to which banks are willing to redeem the funds they collect as credit to the system is directly related to how low their intermediation costs will be. In this paper, it is aimed to estimate the net interest margin determinants of deposit banks in Turkey. Three different panel data models are used for this purpose. These are the Fixed and Random Static models and the GMM (Generalized Moment Models) Dynamic model
Health Care - Diagnostics and Life Science Products: How to penetrate the Eas...Mila Popovic Geoui
This is a case study on market expansion in Eastern-Europe and Russia.
It is focused on the Biotech / MDx / Life Science market.
It provides the rational for selecting a country as a first entry point in this region for further development.
This presentation gives also some clues on how to proceed for the implementation of such a project.
If interested in collaboration please contact me.
Cheers,
Mila
email: milimont@gmail.com
cell phone: 0049 152 099 750 40
Financial instruments statistics important for central banks, and especially for the National Bank of Poland because if the statistical system imposes a responsibility on the central bank it must meet all the requirements of statistical excellence. This is a very important argument, but only a formal one for our interest in this subject. There is a second stream of motives for addressing this problem in central banks. Experience gained over the last decade shows clearly that financial instruments, especially those issued by enterprises, are becoming increasingly important for monetary transmission mechanisms and for financial stability. Among other things, there is empirical evidence that corporate bond spreads lead real economic activity. The situation in the financial instruments market is also meaningful for the general condition of the credit market, as bonds are close substitutes for banking credit. Development of the financial instruments market also contributes to the so-called financial market deepening effect, with multiple consequences for transmission mechanisms.7 It should be noted that, owing to the wide variety of channels through which financial instruments can interfere with monetary policy operations, the central banks are interested in collecting detailed information on these instruments. In practice it results in a complexity of standards for financial instruments security statistics that central banks are expected to meet.
This paper provides a review of the empirical macroeconomic model (EMMA) built for forecasting purposes at the Finnish Labour Institute for Economic Research. The model is quite small, consisting of 71 endogenous and 70 exogenous variables. The number of behavioural equations is 15. The basis of the model is Keynesian, although the model has some novel properties. They are the treatment of the supply side and prices that follow the routes of the neoclassical synthesis. The parameters of the model are estimated from quarterly data that cover the years 1990–2005. The model also contains a Kalman-filtered variable to control the deep recession in Finland at the beginning of the ’90s. This special feature brings the model closer to the new calibrated models.
IJERA (International journal of Engineering Research and Applications) is International online, ... peer reviewed journal. For more detail or submit your article, please visit www.ijera.com
Does European economic integration create more inequality between domestic regions, or is the opposite true? We show that a general answer to this question does not exist, and that the outcome depends on the liberalisation scenario. In order to examine the impact of European and international integration on the regions, the paper develops a numerical simulation model with nine countries and 90 regions. Eastward extension of European integration is beneficial for old as well as new member countries, but within countries the impact varies across regions. Reduction in distance-related trade costs is particularly good for the European peripheries. Each liberalisation scenario has a distinct impact on the spatial income distribution, and there is no general rule telling that integration causes more or less agglomeration.
Authored by Arne Melchior
Published in 2009
Developing economies are different than developed economies in many aspects, i.e., in terms of institutional framework and political situation etc. Thus, the monetary policy needed in developing countries is also different than developed countries. The goal of this study is to investigate exchange rate channel of monetary transmission mechanism in a developing country’s setup. The variables included in our analysis are interest rate, exchange rate, exports, consumer price index and gross domestic product. Johansen cointegration technique is applied to analyze the long run relationship among variables while multivariate VECM granger causality test is used to explore the direction of causality among the set of our variables. We use annual data ranging from 1980 to 2015 while taking account of the limitations of time series data. Our findings suggest that output has a negative long run relationship with exchange rate and interest rate, positive relationship with exports and no statistically significant relationship with inflation. Interest rate granger causes all four of our variables thus showing the power of this policy tool. Exchange rate causes exports, consumer price index and output which means exchange rate is the second most powerful variable in our analysis. Output is granger caused by interest rate, exports and exchange rate which confirms the sensitivity of output to these variables. Consumer price index is granger caused by all four of our variables and came out to be the most sensitive variable in our analysis.
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 costs of (partial) institutional harmonization with the EU acquis which countries of the former USSR are expected to conduct under their Partnership and Cooperation Agreements with the EU and European Neighborhood Policy Action Plans. The public sector will have to take an effort of the transposition and adaptation of EU norms, as well as ensuring that they are complied with. Yet, the major part of the adjustment costs will fall on the private sector, as enterprises will have to make substantial investments to comply with new product requirements and business practices.
In this study we used the method of extrapolation of average costs for CEE countries’ harmonization with acquis to estimate the potential harmonization costs for the neighboring countries based on internationally comparative macroeconomic indicators like sectoral and total value added. This involved estimating the EU pre-accession support for the CEE countries by main areas as a percentage of the total or sectoral value added, determining the expected degree of limited harmonization in the ENP countries and estimating “coefficients of limited harmonization”, which was subsequently used for adjustment of the estimated cost of full harmonization.
Authored by: Veliko Dmitrov
This paper discusses the link between the deficit bias in public finance and institutional settings. The Polish experience is put in a wider context and provides an extensive discussion of possible institutional reforms that may be implemented to stabilise the path of fiscal policy and reduce the deficit bias. Although substantial improvements have been made in Poland with respect to fiscal transparency standards set by the IMF and EU there is still much scope for enhancement. The recommended change in fiscal policy would involve the implementation of medium-term budgetary framework that would ensure consistency between the budgetary process and medium-term fiscal goals. This should be accompanied by the introduction of binding constraints on fiscal policy. The expenditure rule could be reintroduced to strengthen fiscal discipline, as it could force policymakers to tighten fiscal policy. It seems to be indispensable to maintain fiscal rules at the local government level. The issue of still limited fiscal transparency and unsatisfactory performance of fiscal rules requires the undertaking of various appropriatemeasures to strengthen the policy framework in Poland. This can be done in our view by involving external institution entitled to examine fiscal transparency and the performance of fiscal rules in the budgetary process. We think that the institution that is fully capable to take the lead in this respect is the NIK, which was granted full independence in 1994 and has since proved to be successful in overseeing public finances. This should, however, be accompanied by simultaneous enhancement of the internal audit.
Authored by: Rafal Benecki, Jens Holscher, Mariusz Jarmuzek
Published in 2006
Monetary approach to balance of payment establishes a link between foreign reserve assets and money supply. This
link is important for managing balance of payment disequilibrium through adjustment of monetary aggregates. This
study relies on the (Polak, 1957;1997) monetary model with data from 2007:Q1 to 2018:Q4 to examine the link
between monetary factors and balance of payment in Nigeria. To circumvent simultaneity, the reduced form
coefficients of the structural form of the Polak model are estimated using Two Stage Least Squares (TSLS)
technique, while the structural parameters are recovered from the estimated reduced form coefficients. The results
are enriching and robust. The Johansen cointegration procedure suggests a long run relationship among the
macroeconomic variables in the balance of payment function. The estimated balance of payment model reveals that
domestic credit is statistically significant and negatively related to foreign reserve assets, imp lying that balance of
payment is a monetary phenomenon in Nigeria. The velocity of money circulation and the marginal propensity to
import are approximately 120 per cent and 14 per cent, respectively. The study therefore recommends that the
monetary authority should consider the use of domestic credit for management of balance of payment
disequilibrium. It is also pertinent to increase domestic credit to grow the economy since such action will marginally
decrease external reserve assets through increase in import, however, the net effect will enhance the overall
economy.
Inferences from Interest Rate Behavior for Monetary Policy SignalingIOSR Journals
Weak mean reversion of interest rates towards the long term mean suggests high probability of agents in financial markets failing to interpret monetary policy signalling efficiently and financial market related interest rate unable to achieve equilibrium. Increased randomness penetrating interest rate markets is due to the weak monetary policy signalling effect which dilutes information flow from central banks’ to agents in the financial market. In such cases the effectiveness monetary policy erodes as it departs from the objectives of central banks and financial regulators
Opportunity to Foreign Investor in Kosovonakije.kida
Abstract: Purpose of the study is descriptive analysis of questionnaires investment of Kosovo. The main
findings of important contributions to the literature on the effects of FDI on economic growth are highlighted. In
the short and longterm, FDI do not cause an increase in Kosovo. On the other hand, FDI have been directed to
the services sector (with low added value). This proves that the aggregate effect of increasing investments is
unclear because different institutional components (business climate, weak enforcement of law, corruption, etc.),
have hindered the attraction of FDI. Identifying determinants of FDI, are important for compiling of FDI
promotion policy of certain types to contribute to the growth.
Keywords: FDI; Kosovo investment, Obstacles, Opportunities to Foreing Investment in Kosovo, Descriptive
analysis.
The aim of this study is to undertake an up-to-date assessment of market power in Central and Eastern European banking markets and explore how the global financial crisis has affected market power and what has been the impact of foreign ownership. Three main results emerge. First, while there is some convergence in country-level market power during the pre-crisis period, the onset of the global crisis has put an end to this process. Second, bank-level market power appears to vary significantly with respect to ownership characteristics. Third, asset quality and capitalization affect differently the margins in the pre-crisis and crisis periods. While in the pre-crisis period the impacts are similar for all banks regardless of ownership status, in the crisis period non-performing loans have a negative effect and capitalization a positive effect only for domestically-owned banks.
Authored by: Georgios Efthyvoulou, Canan Yildirim
Published in 2013
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 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
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
Estimation of Net Interest Margin Determinants of the Deposit Banks in Turkey...inventionjournals
Banks, which are the irreplaceable intermediaries of the financial system, are financial institutions that significantly contributeto economic development. The basiccriterion that indicates the efficiency of the intermediation activities of banks is the net interest margins. These costs are assumed to be high for developing countries such as Turkey. The degree to which banks are willing to redeem the funds they collect as credit to the system is directly related to how low their intermediation costs will be. In this paper, it is aimed to estimate the net interest margin determinants of deposit banks in Turkey. Three different panel data models are used for this purpose. These are the Fixed and Random Static models and the GMM (Generalized Moment Models) Dynamic model
Health Care - Diagnostics and Life Science Products: How to penetrate the Eas...Mila Popovic Geoui
This is a case study on market expansion in Eastern-Europe and Russia.
It is focused on the Biotech / MDx / Life Science market.
It provides the rational for selecting a country as a first entry point in this region for further development.
This presentation gives also some clues on how to proceed for the implementation of such a project.
If interested in collaboration please contact me.
Cheers,
Mila
email: milimont@gmail.com
cell phone: 0049 152 099 750 40
Financial instruments statistics important for central banks, and especially for the National Bank of Poland because if the statistical system imposes a responsibility on the central bank it must meet all the requirements of statistical excellence. This is a very important argument, but only a formal one for our interest in this subject. There is a second stream of motives for addressing this problem in central banks. Experience gained over the last decade shows clearly that financial instruments, especially those issued by enterprises, are becoming increasingly important for monetary transmission mechanisms and for financial stability. Among other things, there is empirical evidence that corporate bond spreads lead real economic activity. The situation in the financial instruments market is also meaningful for the general condition of the credit market, as bonds are close substitutes for banking credit. Development of the financial instruments market also contributes to the so-called financial market deepening effect, with multiple consequences for transmission mechanisms.7 It should be noted that, owing to the wide variety of channels through which financial instruments can interfere with monetary policy operations, the central banks are interested in collecting detailed information on these instruments. In practice it results in a complexity of standards for financial instruments security statistics that central banks are expected to meet.
This paper provides a review of the empirical macroeconomic model (EMMA) built for forecasting purposes at the Finnish Labour Institute for Economic Research. The model is quite small, consisting of 71 endogenous and 70 exogenous variables. The number of behavioural equations is 15. The basis of the model is Keynesian, although the model has some novel properties. They are the treatment of the supply side and prices that follow the routes of the neoclassical synthesis. The parameters of the model are estimated from quarterly data that cover the years 1990–2005. The model also contains a Kalman-filtered variable to control the deep recession in Finland at the beginning of the ’90s. This special feature brings the model closer to the new calibrated models.
IJERA (International journal of Engineering Research and Applications) is International online, ... peer reviewed journal. For more detail or submit your article, please visit www.ijera.com
Does European economic integration create more inequality between domestic regions, or is the opposite true? We show that a general answer to this question does not exist, and that the outcome depends on the liberalisation scenario. In order to examine the impact of European and international integration on the regions, the paper develops a numerical simulation model with nine countries and 90 regions. Eastward extension of European integration is beneficial for old as well as new member countries, but within countries the impact varies across regions. Reduction in distance-related trade costs is particularly good for the European peripheries. Each liberalisation scenario has a distinct impact on the spatial income distribution, and there is no general rule telling that integration causes more or less agglomeration.
Authored by Arne Melchior
Published in 2009
Developing economies are different than developed economies in many aspects, i.e., in terms of institutional framework and political situation etc. Thus, the monetary policy needed in developing countries is also different than developed countries. The goal of this study is to investigate exchange rate channel of monetary transmission mechanism in a developing country’s setup. The variables included in our analysis are interest rate, exchange rate, exports, consumer price index and gross domestic product. Johansen cointegration technique is applied to analyze the long run relationship among variables while multivariate VECM granger causality test is used to explore the direction of causality among the set of our variables. We use annual data ranging from 1980 to 2015 while taking account of the limitations of time series data. Our findings suggest that output has a negative long run relationship with exchange rate and interest rate, positive relationship with exports and no statistically significant relationship with inflation. Interest rate granger causes all four of our variables thus showing the power of this policy tool. Exchange rate causes exports, consumer price index and output which means exchange rate is the second most powerful variable in our analysis. Output is granger caused by interest rate, exports and exchange rate which confirms the sensitivity of output to these variables. Consumer price index is granger caused by all four of our variables and came out to be the most sensitive variable in our analysis.
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 costs of (partial) institutional harmonization with the EU acquis which countries of the former USSR are expected to conduct under their Partnership and Cooperation Agreements with the EU and European Neighborhood Policy Action Plans. The public sector will have to take an effort of the transposition and adaptation of EU norms, as well as ensuring that they are complied with. Yet, the major part of the adjustment costs will fall on the private sector, as enterprises will have to make substantial investments to comply with new product requirements and business practices.
In this study we used the method of extrapolation of average costs for CEE countries’ harmonization with acquis to estimate the potential harmonization costs for the neighboring countries based on internationally comparative macroeconomic indicators like sectoral and total value added. This involved estimating the EU pre-accession support for the CEE countries by main areas as a percentage of the total or sectoral value added, determining the expected degree of limited harmonization in the ENP countries and estimating “coefficients of limited harmonization”, which was subsequently used for adjustment of the estimated cost of full harmonization.
Authored by: Veliko Dmitrov
This paper discusses the link between the deficit bias in public finance and institutional settings. The Polish experience is put in a wider context and provides an extensive discussion of possible institutional reforms that may be implemented to stabilise the path of fiscal policy and reduce the deficit bias. Although substantial improvements have been made in Poland with respect to fiscal transparency standards set by the IMF and EU there is still much scope for enhancement. The recommended change in fiscal policy would involve the implementation of medium-term budgetary framework that would ensure consistency between the budgetary process and medium-term fiscal goals. This should be accompanied by the introduction of binding constraints on fiscal policy. The expenditure rule could be reintroduced to strengthen fiscal discipline, as it could force policymakers to tighten fiscal policy. It seems to be indispensable to maintain fiscal rules at the local government level. The issue of still limited fiscal transparency and unsatisfactory performance of fiscal rules requires the undertaking of various appropriatemeasures to strengthen the policy framework in Poland. This can be done in our view by involving external institution entitled to examine fiscal transparency and the performance of fiscal rules in the budgetary process. We think that the institution that is fully capable to take the lead in this respect is the NIK, which was granted full independence in 1994 and has since proved to be successful in overseeing public finances. This should, however, be accompanied by simultaneous enhancement of the internal audit.
Authored by: Rafal Benecki, Jens Holscher, Mariusz Jarmuzek
Published in 2006
Monetary approach to balance of payment establishes a link between foreign reserve assets and money supply. This
link is important for managing balance of payment disequilibrium through adjustment of monetary aggregates. This
study relies on the (Polak, 1957;1997) monetary model with data from 2007:Q1 to 2018:Q4 to examine the link
between monetary factors and balance of payment in Nigeria. To circumvent simultaneity, the reduced form
coefficients of the structural form of the Polak model are estimated using Two Stage Least Squares (TSLS)
technique, while the structural parameters are recovered from the estimated reduced form coefficients. The results
are enriching and robust. The Johansen cointegration procedure suggests a long run relationship among the
macroeconomic variables in the balance of payment function. The estimated balance of payment model reveals that
domestic credit is statistically significant and negatively related to foreign reserve assets, imp lying that balance of
payment is a monetary phenomenon in Nigeria. The velocity of money circulation and the marginal propensity to
import are approximately 120 per cent and 14 per cent, respectively. The study therefore recommends that the
monetary authority should consider the use of domestic credit for management of balance of payment
disequilibrium. It is also pertinent to increase domestic credit to grow the economy since such action will marginally
decrease external reserve assets through increase in import, however, the net effect will enhance the overall
economy.
Inferences from Interest Rate Behavior for Monetary Policy SignalingIOSR Journals
Weak mean reversion of interest rates towards the long term mean suggests high probability of agents in financial markets failing to interpret monetary policy signalling efficiently and financial market related interest rate unable to achieve equilibrium. Increased randomness penetrating interest rate markets is due to the weak monetary policy signalling effect which dilutes information flow from central banks’ to agents in the financial market. In such cases the effectiveness monetary policy erodes as it departs from the objectives of central banks and financial regulators
Opportunity to Foreign Investor in Kosovonakije.kida
Abstract: Purpose of the study is descriptive analysis of questionnaires investment of Kosovo. The main
findings of important contributions to the literature on the effects of FDI on economic growth are highlighted. In
the short and longterm, FDI do not cause an increase in Kosovo. On the other hand, FDI have been directed to
the services sector (with low added value). This proves that the aggregate effect of increasing investments is
unclear because different institutional components (business climate, weak enforcement of law, corruption, etc.),
have hindered the attraction of FDI. Identifying determinants of FDI, are important for compiling of FDI
promotion policy of certain types to contribute to the growth.
Keywords: FDI; Kosovo investment, Obstacles, Opportunities to Foreing Investment in Kosovo, Descriptive
analysis.
This powerpoint was created to show senior management of an event planning company the entire process of the Smith/Doe wedding planning process. This presentation shows budgets, budget forcasting, profit, quality control, risk management, communication plan also work breakdown structures.
This study reviews monetary policy options that are seemingly viable for adopting the euro by the new Member States of the European Union. A fully autonomous direct inflation targeting is believed to be suboptimal for convergence to the euro as it does not incorporate convergence parameters into the central bank reaction function and instrument rules. In an attempt to correct for such deficiency, this study advocates adopting a framework of relative inflation forecast targeting where a differential between the domestic and the eurozone inflation forecasts becomes the main objective of the central bank's decisions.
At the same time, some attention to the exchange rate stability objective becomes necessary for facilitating the monetary convergence process. Foreign exchange market interventions, rather than interest rate adjustments, are viewed as a preferred way of achieving this objective.
Authored by: Lucjan T. Orlowski
Published in 2005
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 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
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
This paper uses a multi region DSGE model with collateral constrained households and residential investment to examine the effectiveness of fiscal policy stimulus measures in a credit crisis. The paper explores alternative scenarios which differ by the type of budgetary measure, its length, the degree of monetary accommodation and the level of international coordination. In particular we provide estimates for New EU Member States where we take into account two aspects. First, debt denomination in foreign currency and second, higher nominal interest rates, which makes it less likely that the Central Bank is restricted by the zero bound and will consequently not accommodate a fiscal stimulus. We also compare our results to other recent results obtained in the literature on fiscal policy which generally do not consider credit constrained households.
Authored by: Jan in't Veld, Werner Roeger, István P. Székely
Published in 2011
This paper describes the general framework of the EU’s emerging relationship with its new neighbours and investigates the potential economic impact of the European Neighbourhood Policy (ENP), both for the EU itself and for its neighbours. In particular, it seeks to develop an answer to the question of whether the ENP is sufficiently attractive so as to induce the governments in neighbourhood countries to adopt (or accelerate the adoption of) the types of economic and governance reforms that were implemented in the new member states during their accession processes. Although the specifics of the ENP are still being developed, the lack of incentives as regards to unclear accession to the EU is identified as the main weakness of the ENP.
Economically, the ENP seeks to ease trade restrictions through the implementation of legislative approximation and convergence with EU standards, before accessing the EU’s single market can become a reality. Positively though, is that the access to the single market could improve significantly under the ENP. As experienced by the Central European states, FDI is instrumental to transform the economies of the Western CIS and the Caucasus. The ENP can be a supportive framework for improving investor confidence. Likewise, the new European Neighbourhood Instrument can add more coherence in technical assistance, and provide more financial support for creating capacities for trade infrastructures and institutional and private sector development. Finally, measures to promote increased labour migration between the new neighbours and the enlarged EU may be worth to put on the agenda for the future development and impact of the ENP.
Authored by: Susanne Milcher, Ben Slay
Published in 2005
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 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
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
This working document offers a conceptual framework for understanding the processes underpinning the external dimension of EU Justice and Home Affairs (ED-JHA). Practically, it defines how the export of JHA principles and norms inform the geopolitical ambitions of the EU, i.e. the use of space for political purposes, or the control and management of people, objects and movement. The author begins by investigating how the ENP reconfigures the ED-JHA, and then goes on to discuss various conceptual stances on governance, specifically institutionalism, constructivism, and policy instruments. To conclude he traces the evolution of this external dimension, emphasising, whenever possible, its continuities and bifurcations. Overall, the aim is to ascertain the extent to which conceptual designs clarify or advance our knowledge of the contents and rationales of the ED-JHA.
Authored by: Thierry Balzacq
Published in 2008
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
This paper studies costs and benefits of institutional harmonisation in the context of EU relations with its neighbors. The purpose of this paper is to outline the likely forms of institutional harmonisation between the EU and its Eastern neighbors and provide an
overview of the methodologies that can be used in measuring its effects (costs and benefits). This paper serves as a background for two measurement exercises – one on benefits and another on costs – that are to be undertaken during the second stage of research.
Authored by: Veliko Dimitrov, Vladimir Dubrovskiy, Anna Kolesnichenko, Irina Orlova
Published in 2007
This paper shows that the monetary policy paradigm that was in place before the financial crisis worked very well and that the crisis occurred only after policy makers deviated from that paradigm. The paper also evaluates monetary policy during the financial crisis by dividing the crisis into three periods: pre-panic, panic and post-panic. It shows that the extraordinary measures did not work well in the pre-panic or the post-panic periods; instead they helped bring on the panic, even though they may have some positive impact during the panic. The implication of the paper is that the crisis does not call for a new paradigm for monetary policy.
Authored by: John B. Taylor
Published in 2010
Both the economic and the political economy arguments point to fast EMU accession of NMS. Looking at the 'classical' optimum currency area criteria, i.e. trade integration, co-movement of business cycles and actual factor mobility, NMS' record is not worse, on average, than that of the current Eurozone members, and should further improve before Eurozone entry, decreasing risk of their exposure to idiosyncratic shocks. After joining the EMU, the common currency should help NMS to develop additional intra- EMU trade links, further synchronize business cycle and increase factor mobility. Both theoretical arguments and empirical experience demonstrates that so-called real convergence accompanies nominal convergence, and that there is synergy rather than a trade-off between the two.
Authored by: Marek Dąbrowski
Published in 2005
Upward Social Convergence in the EU: definition and measurement - Massimilia...Massimiliano Mascherini
This presentation was given at the seminar co-organized by Eurofound and the Italian Permanent Representation to the European Union on 6/11/2019
It is based on the report
“Upward Convergence in the EU:
Concepts measurements and Indicators”
Which is available here:
https://goo.gl/ttS8wY
background document of the seminar:
The European Union was defined by the World Bank as the “modern world’s greatest convergence Machine” for its capacity of propelling least performing Member States towards best performing countries in both the economic and social dimension.
The economic crisis halted upward convergence trends especially in employment and living conditions. While since 2013 convergence trends are coming back, the gravity of the crisis heightened the need to address social asymmetries besides the economic ones. The idea that “economic and social convergence should go hand in hand” is now central to the policy debate. The recently proclaimed European Pillar of Social Rights aims at being a compass to upward convergence towards better working and living conditions.
However, what is social convergence? And what is upward convergence? And how do we measure it? While these two concepts are now more and more popular in the European policy debate, scientific literature around them is scarce. According to Scopus, among the 30,000 scientific articles in economy or social science discussing convergence, only 55 discuss social convergence and even fewer upward convergence of which not a real definition exists.
For this reason, the aim of the seminar is to:
• Discuss the definition of upward convergence,
• Measure upward convergence, differences and caveats of the various measurements,
• Assess where Europe is in terms of upward convergence and the latest trends the social dimension of the European Union,
• See how Italy behaved in terms of upward convergence in comparison to other countries.
As one hint of what Eurofound will present on 6 November, our first results show that over the period 2008-2016, while the employment and activity rate as well as social exclusion index and AROPE reveal an upward convergence trends, some other indicators exhibit a pattern of either downward convergence (material deprivation and in-work poverty as well as long-term unemployment rate and average weekly hours worked) or downward divergence (Inequality, NEET rate, unemployment rate, involuntary temporary work and part time) with greater differences at the regional level.
Implementation of the European internal market and East-West integration has been accompanied by dramatic change in the spatial distribution of economic activity, with higher growth west and east of a longitude degree through Germany and Italy. In the east, income growth has been accompanied by increasing regional disparities within countries. We examine theoretically and empirically whether European integration as such can explain these developments. Using a numerical simulation model with 9 countries and 90 regions, theoretical predictions are derived about how various patterns of integration may affect the income distribution. Comparing with reality, we find that a reduction in distance-related trade costs combined with east-west integration is best able to explain the actual changes in Europe's economic geography. This suggests that the implementation of the European internal market or the Euro has "made Europe smaller". In Central Europe, capital regions grow faster and there are few east-west growth differences inside countries. There is no convincing support for the hypothesis that European integration had adverse effects on non-members.
Authored by: Arne Melchior
Published in 2009
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 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.
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The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
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#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
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How to get verified on Coinbase Account?_.docxBuy bitget
t's important to note that buying verified Coinbase accounts is not recommended and may violate Coinbase's terms of service. Instead of searching to "buy verified Coinbase accounts," follow the proper steps to verify your own account to ensure compliance and security.
how can i use my minded pi coins I need some funds.DOT TECH
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What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
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how to sell pi coins at high rate quickly.DOT TECH
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A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
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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
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3. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
This report is part of the CASE Network Studies and Analyses series.
The CASE Network is a group of economic and social research centers in Poland, Kyrgyzstan,
Ukraine, Georgia, Moldova, and Belarus. Organizations in the network regularly conduct joint
research and advisory projects. The research covers a wide spectrum of economic and social
issues, including economic effects of the European integration process, economic relations
between the EU and CIS, monetary policy and euro-accession, innovation and competitiveness,
and labour markets and social policy. The network aims to increase the range and quality of
economic research and information available to policy-makers and civil society, and takes an
active role in on-going debates on how to meet the economic challenges facing the EU, post-transition
countries and the global economy.
The CASE network consists of:
• CASE – Center for Social and Economic Research, Warsaw, est. 1991,
www.case-research.eu
• CASE – Center for Social and Economic Research – Kyrgyzstan, est. 1998,
www.case.elcat.kg
• Center for Social and Economic Research - CASE Ukraine, est. 1999,
www.case-ukraine.kiev.ua
• CASE –Transcaucasus Center for Social and Economic Research, est. 2000,
www.case-transcaucasus.org.ge
• Foundation for Social and Economic Research CASE Moldova, est. 2003,
www.case.com.md
• CASE Belarus ‐ Center for Social and Economic Research Belarus, est. 2007
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4. CASE Network Studies & Analyses No. 358
3
Contents
Abstract.........................................................................................................................................................5
I. Introduction .............................................................................................................................................6
II. Instrument Rule for a Converging Economy – General Assumptions .....................................................7
III. Instrument Rule Models for Open Converging Economies..................................................................10
IV. Stability of the Input Variables.............................................................................................................15
V. Emprical Tests of Open‐Economy Convergence‐Consistent Instrument Rule....................................21
VI. A Synopsis and Policy Recommendations...........................................................................................26
References ..................................................................................................................................................28
5. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
Lucjan T. Orlowski
Professor of economics and international finance in the John F. Welch College of Business at
Sacred Heart University, Fairfield, Connecticut, USA. His research focuses on monetary
economics and stabilization policies in transition economies as well as emerging financial
markets. He has authored three books, several chapters in edited volumes and numerous
articles in academic journals on monetary policy, exchange rates, interest rates, and
international financial markets. His edited volume “Transition and Growth in Post-Communist
Countries: The Ten-Year Experience”, E.Elgar Publishing Inc., Cheltenham, U.K. and
Northampton, Massachusetts, 2001 was honored with the 2002 Choice Magazine Award for
Outstanding Title of the Year. He serves on the Editorial Board of Comparative Economic
Studies, is an Associate Editor of Emerging Markets Finance and Trade, a Regional Editor of
Journal of Emerging Markets and a Guest Editor of Open Economies Review. Professor
Orlowski is a senior research fellow and a member of the Advisory Council of the CASE
Foundation, a senior fellow in the William Davidson Institute at the University of Michigan, at the
DIW Berlin and at HIW in Halle. He was a member of the Macroeconomic Policy Council of
Poland's Minister of Finance and an adviser to the National Bank of Poland.
4
6. CASE Network Studies & Analyses No. 358
5
Abstract
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 forward-looking
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.
7. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
I. Introduction
Monetary policies in countries converging to a common currency system cannot be
based exclusively on discretionary responses to observed or anticipated shocks to inflation and
to other target variables. Since convergence to a common currency is a multifaceted process
that is comprised of closing the gaps in inflation rates, interest rates as well as stabilizing
exchange rates, a transparent, forward-looking instrument rule would be helpful for achieving
these at times exclusive tasks.
This study aims at proposing a forward-looking instrument rule for an open-economy
undergoing monetary convergence to a common currency system. Such policy rule ought to
include real interest rate, inflation gap, output gap and exchange rate gap as independent or
input variables, which guide changes in short-term interest rates as policy instruments chosen
by a central bank. By assumption, these input variables shall be devised as differentials
between domestic and the corresponding currency area variables in order to monitor and guide
the convergence process effectively. The relative treatment of input variables is consistent with
the policy framework of targeting inflation forecast differentials proposed for converging
economies by Orlowski (2008). Thus in essence, this study examines instrument rules and
conditions of their implementation that are consistent with the relative-inflation-forecast-targeting
framework.
Feasibility of the proposed instrument rule is examined for the three largest countries
pursuing convergence to the euro, i.e. for Poland, Hungary and the Czech Republic. In contrast
to smaller euro-candidate countries that follow convergence based on currency pegs to the
euro, monetary authorities of these larger states have chosen more flexible policy venues based
on inflation targeting. The Czech National Bank (CNB) has been focusing on inflation targeting
since January 1998, the National Bank of Poland (NBP) since January 1999 and the National
Bank of Hungary (NBH) since May 2001. As these are euro-candidate countries, their
instrument rules for monetary policy cannot be fully autonomous, i.e. based on a simple
6
8. CASE Network Studies & Analyses No. 358
framework originally proposed by Taylor (1993). Arguably, these three central banks do not
follow a homogeneous policy prescription. A more uniform, forward-looking rule would provide
them with useful guidance for monitoring and implementing the euro-convergence process.
Section II of our paper is a background discussion on the standard Taylor rule and states
assumptions for their extensions for open converging economies. Several models of a forward-looking
instrument rule that is conducive for such economies are developed and discussed in
Section III. A testable version of the model is presented in Section IV, which also examines the
degree of stability of the key independent variables in the three euro-candidate countries.
Empirical tests of the heteroscedasticity-consistent OLS regression of the underlying instrument
rule model are presented and discussed in Section V. Section VI summarizes the key findings
and offers policy conclusions that seem relevant for the euro-candidate countries.
7
II. Instrument Rule for a Converging Economy – General
Assumptions
Monetary policy in an economy converging to a common currency system cannot be
implemented exclusively through discretionary reactions. It needs to be guided by
predetermined rules for changes in the policy instrument (short-term interest rates) in response
to a set of input variables, at minimum, to deviations of actual output from potential output as
well as actual from targeted inflation. For a converging economy, the instrument rule should also
encompass the main criteria of monetary convergence, such as lowering the gap between the
domestic and the currency area inflation, as well as the interest rate gap and securing exchange
rate stability. Moreover, a credible policy rule is likely to gear expectations or future predictions
of changes in these variables to the convergence thresholds, such as the EU-prescribed
Maastricht criteria.
Devising a sensible, robust rule for monetary policy in a converging economy is a
complex task. A general assumption for such rule is that changes in the central bank reference
interest rates should react to changes in the forecasts of the input variables, i.e. regressors or
independent variables in the policy rule function. These input variables for a converging
9. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
economy include the inflation gap (the difference between the inflation forecast and the inflation
target), the output gap (the difference between the actual and potential output) and the
exchange rate gap (deviation between the exchange rate forecast and the officially-declared
convergence rate).
Complexity of an open converging economy instrument rule arises from a number of
factors. Among them are:
1. Not only domestic, but also the currency-area input variables need to be included in the
instrument rule, in order to guide the monetary convergence process more effectively.
2. Determination of the target variables for a converging economy ought to take into
consideration the corresponding currency-area targets.
3. The instrument rule should be forward-looking, based on forecast variables in
consistency with the forward-looking nature of the convergence process.
4. For the purpose of developing accurate and reliable forecasts, the input variables must
be relatively stable. Therefore, a prior record of financial stability shall precede adoption
of an instrument rule.
5. Small, converging economies are normally subject to large nominal and real external
shocks. Therefore the instrument rule should include exchange rate smoothing, in
addition to the standard low inflation and output gap objectives.
6. Data distribution of nominal variables such as inflation, interest rates and exchange rates
is usually lekptokurtic, thus characterized by thin waist and long tails. This means that
their fluctuations are small and well-contained around their mean value at tranquil
periods, but their volatility tends to be magnified at turbulent times at financial markets.
For this reason, the empirical assessment of the instrument rule must incorporate
modules that account for leptokurtosis of the input variables (such as the generalized
error distribution parameterization in volatility dynamics tests)1.
1 Prevalence of leptokurtosis of the indicator variables has been identified by Svensson (2003) as a factor questioning
practicality of standard Taylor rules. However, recent advances in econometric modeling and forecasting allow for
correcting this deficiency. In a similar vein, Orphanides (2003) shows that the Taylor rule would have resulted in an
inferior macroeconomic performance during the inflation shock of the 1970s.
8
10. CASE Network Studies & Analyses No. 358
Instrument rules for monetary policy are derived from the baseline model developed by
John B. Taylor (1993). The original Taylor rule is aimed at tracking interest rate decisions of the
U.S. Federal Reserve in response to the observed changes in the inflation gap and the output
gap.
9
The baseline Taylor model can be stated as
t t t ( t t ) y ( t t ) i = r +π +α π −π +α y − y π ˆ (1)
t i
The target nominal short-term interest rate is the dependent variable related to a set of
regressors that include the long-term equilibrium (the Wicksellian) real interest rate rˆ
t , the rate
of inflation
t π
(measured in the original Taylor model by the GDP deflator), the “desired” or
target-rate of inflation t π
, the log of real GDP t , and the log of potential output y t y . The
feedback coefficients for the inflation gap t t π −π and for the output gap t t y − y are denoted by
π α and y α respectively.
The original Taylor model included the GDP deflator and the output deviation from its
linear trend as input variables, in addition to the steady-state nominal interest rate. The model
specification was backward-looking and based on equal 0.5 weights on the inflation and the
output gaps. An influential modification to the Taylor model was introduced by Clarinda, Galí
and Gertler (1998 and 2000). Their model included a Blue Chip inflation forecast, deviation of
(log) of industrial production from its quadratic trend as well as one- and two-period lagged
federal funds rate as input variables. Unlike the original Taylor model, the Clarida, et al.(1998,
2000), model is forward-looking and it uses variable weights on π α and y α parameters as well
as interest rate smoothing. Among more recent versions, a noteworthy modification that is
particularly useful for forecasting changes in the U.S. federal funds rate has been introduced by
Keonig (2006). Comparing to Clarida, et al.(1998, 2000), the Koenig model applies current
minus five-year moving average unemployment rates rather than the industrial production as a
proxy of the output gap. It also uses a difference between the actual and the trend GDP, as
approximated by the Blue Chip GDP forecast, as well as the first-order autoregressive
movement of the federal funds rate. The Koenig model is forward-looking and it assumes
variable weights on output and inflation gaps as well as interest rate smoothing. According to
the empirical evaluation of various types of Taylor rules by Fernandez and Nikolsko-Rzhevskyy
11. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
(2007), the Koenig model outperforms the others in terms of most accurate tracking of the
pattern in the U.S. federal funds rate.
The empirical tests confirm a notion that the Taylor rule has some unique properties that
are helpful for guiding monetary policies under different systemic conditions. One of its foremost
properties has been identified by Woodford (2001) as the “Taylor principle”. According to this
notion, nominal interest rates must be raised by more that the rise in inflation for the purpose of
achieving monetary stability, because as implied by the Taylor formula, inflation will remain
under control only if real interest rates rise in response to a surge in inflation. The practical
importance of the Taylor principle is highlighted by the empirical results of Clarida, et al., (1998).
Their research shows that the U.S. Federal Reserve and several other central banks violated
the Taylor principle in the 1960 and 1970 pursuing excessively expansionary policy that resulted
in persistently high inflation. This is a valuable lesson for implementing effective monetary
convergence in countries aspiring to join a common currency area.
III. Instrument Rule Models for Open Converging Economies
Since its original formulation by Taylor, the interest rate rule has undergone a number of
modification and extensions aimed at reflecting policy decisions of various central banks more
accurately. The extensions proposed in this paper are geared toward conditions of open
economies that are converging to a common currency system. The model is build on the
assumption that the monetary authority follows open economy inflation targeting framework
along the characteristics originally devised by Ball (1999) and Svensson (2000), and expanded
by Kuttner (2004). In an open-economy setting, the objective of lowering the exchange rate
gap, i.e. reducing deviations between the actual and the dynamic equilibrium exchange rate is
added to the containment of inflation gap and output gap policy goals. In essence, a diminishing
tendency of the residuals between the actual and the target (dynamic equilibrium) rate means
assuming a monetary policy objective of a declining exchange rate risk (Orlowski, 2003).
10
12. CASE Network Studies & Analyses No. 358
Open-economy instrument rule that is derived from the baseline Taylor model
11
supplemented with the exchange rate stability objective can be formulated as
t t t ( t t ) y t s t i r π α π π α y α s π = ˆ + + − + & + (2)
The exchange rate stability objective is specified by t t t s& = s − s , i.e. as the difference
between the market exchange rate and its long-run equilibrium. For the countries converging to
the euro, s t is the euro-value of the candidate’s domestic currency, meaning that a decline in
s
t reflects domestic currency depreciation against the euro. The output gap is denoted by
t t t y& = y − y .
It shall be further noted that the part of Eq. (2) composed of ( ) t t y t s t α π π α y α s π − + & +
denotes risk components or risk premia stemming from excessive inflation, the output gap and
domestic currency depreciation, above the risk-free nominal interest rate t t rˆ +π .
Parameterization of the feedback coefficient is likely to evolve along with systemic
s changes that α
follow subsequent steps of integration with the EU and convergence to the euro.
At the initial stage of integration that prioritizes curtailing high inflation and restoring foundations
of price stability, a relatively strict variant of DIT is adopted. Consistently, the weight on α π is
close to unity, with α y and being close to zero. After the fundamental price stability is
s α
achieved, policy-makers may move to the second stage of integration and convergence that is
characterized by a more flexible variant of DIT, which combines the goals of low inflation with
the output growth that is necessary to develop a competitive modern economy that might adopt
the euro without a danger of potentially large structural shocks and institutional disturbances.
During the second stage, the feedback parameters α α π and y can be assigned equal 0.5
weights, with being kept at zero. By assumption, a smooth adoption of the euro can only
take place when competitive business structures and institutions are in place (Kenen and
Meade, 2003; Eichengreen, 2005; Kočenda, et.al, 2006). Otherwise, a premature adoption of a
common currency may entail excessive opportunity costs; in other words, it may result in
significant output losses.
13. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
At the final stage of convergence to the euro, the weight on s α
will likely exceed the
sum of α α y π + . In particular, this scenario will have to prevail upon the entry to the ERM2
mechanism, which needs to be maintained during a two-year period preceding the official
adoption of the euro.
Before developing an instrument rule that might be conducive to the pre-ERM2 stage, it
seems useful to overview several extensions of the baseline Taylor model for open economies.
Among them, one possible option is a constant-target interest-rate rule that can be prescribed
as
( ) t t t t t y t s t i r π α π π α y& α s& π = ˆ + + − + + (3)
This policy scenario assumes that the nominal short-term interest rate remains fixed and
possible surges in one or more of the input variables are offset by adjustments in others.
Specifically, a rise in inflation can be curtailed by domestic currency appreciation induced by
foreign exchange market intervention, i.e. a purchase of domestic currency with foreign
currency reserves. Therefore, a policy approach consistent with the constant-target interest-rate
rule seems to necessitate a managed floating exchange rate regime. It is because foreign
exchange market interventions responding to large capital inflows or outflows will have to be
conducted for securing a stable path of the short-term interest rate. However, due to the
prevalent inefficiency of market interventions, such policy is generally not sensible (Woodford,
2007).
A more pragmatic approach that is likely to guide expectations to the target and the
forecast variables is a market-forecast interest-rate rule. It follows the precepts of inflation
forecast targeting (IFT) regime originally proposed by Svensson (1999) and more recently
discussed among others by Woodford (2007). IFT is an attractive policy approach as its
forward-looking or forecast-based specification allows for smoothing deviations between the
inflation forecast and the inflation target2. In an open-economy setting, it may also entail
2 Against the backdrop of the significant easing of U.S. monetary policy in the fourth quarter of 2007 and in the first
half of 2008, the arguments in favor of adoption of explicit forecast-targeting framework discussed by Woodford
(2007) are particularly relevant. The ‘grand easing’ by the Federal Reserve in the second half of 2007 and the first
half of 2008 created a situation of ‘intertemporal inconsistency’ between the monetary policy goals (price stability) and
the policy actions. For this reason, it ought to be explained as a temporary departure from a disciplined monetary
policy that is aimed at cushioning potentially damaging real-economy effects of the sub-prime mortgage and the
global credit market crisis. An earliest possible return to a policy based on inflation forecast targeting would allow
continuous confidence in the value of the dollar and, at the same time, would facilitate stabilization of the real
economy (Woodford, 2007).
12
14. CASE Network Studies & Analyses No. 358
forecasts of the exchange rate and the output gap. In consistency with an open-economy IFT,
the market-forecast interest rate rule can be specified as
13
τ π ( τ ) τ τ π α π π α α + + + + = + + − + + t t t t t y t s t i rˆ y& s& (4)
The displacement parameter τ reflects the time horizon of the official forecast of policy-makers
for the monitored independent variables.
It can be further assumed that the exchange rate gap may be replaced with the available
forward market rate for τ -periods ahead, following the principle that the forward rates are
normally good predictors of a future path of spot market rates, due to corrective currency
arbitraging. Specifically, if the initial forecast for the spot rate of foreign currency is above the
forward rate, currency speculators will find incentives to buy foreign currency spot and exercise
the forward selling contracts. The increasing speculative demand for foreign currency in spot
market trading will adjust the spot rate closer to the path implied by the forward rate. Certainly, a
spot-rate forecast above the forward rate path will induce speculative foreign currency selling,
thus foreign currency depreciation until the spot rate falls down to the forward path.
The third available policy rule option that is particularly relevant for the euro-candidate
countries can be prescribed as projected interest-rate rule, consistent with the Maastricht
convergence criteria. These EU-imposed monetary convergence benchmarks for the
candidates for adopting the euro include the reference rates for inflation, exchange rate and
long-term bond yield. Accordingly, the inflation rate of the candidate cannot exceed 1.5 percent
above the average of three lowest national inflation rates among the EU members – it can be
denoted as M
t π
. The Maastricht-reference domestic 10-year bond yield LM
t R +τ cannot exceed
two percent above the average of 10-year bond yields of the same three countries. In addition,
the candidate country currency rate against the euro shall remain within a ‘normal’ band of
permitted fluctuations around an officially-chosen reference exchange rate M
t s , which is usually
determined upon entering the ERM2. The instrument rule function consistent with the Maastricht
benchmarks can be formulated as
( ) ( ) ( M )
i = r ˆ + α R LM
− R S
+ α π − π M
+ α y + α s − s (5)
t t R t & + τ t
+ τ π t + τ t
+ τ y t s t + τ t
+ τ
15. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
In this functional relationship, the domestic inflation forecast is proxied by the term
spread on government bonds ( S )
R LM
− R , t +τ t
+τ assuming that the projected long-term bond yield is
consistent with the Maastricht reference bond yield. More importantly, changes in the target
interest rate respond by the π α parameter to the deviation between the inflation forecast for the
τ -period ahead and the anticipated Maastricht reference rate for inflation. The technical
problem of such policy implementation is that the Maastricht reference rate for inflation as
published by the European Central Bank is not forward-looking; it is ex-ante determined instead.
Therefore, the M
t τ π + variable shall be treated as the forecast of the reference rate for the τ -
period ahead. The exchange rate reference rate M
t s +τ is pre-determined. According to the euro-accession
procedure, the official reference value of the euro in local currency is subject to
‘normal’ currency fluctuations and it cannot be devalued during a two-year period preceding the
examination time for the euro adoption. The reference exchange rate can be consistent with the
long-run equilibrium rate. Nevertheless, a small disparity between the official and the
equilibrium rates might be prudent. A small revaluation margin, i.e. a stronger official than the
equilibrium value of the local currency allows room for expected appreciation pressures
stemming from the remnants of Balassa-Samuelson effects (Orlowski and Rybinski, 2006).
In essence, parameterization of the Maastricht consistent instrument rule prescribed by
Eq.(5) is technically complex, mainly due to the need to forecast long-term interest rate, long-term
equilibrium exchange rate and inflation reference rates. In addition, its effective
implementation depends on a pre-determined choice of the α parameters, with a gradually
increasing weight assigned to s α
. Because of its complexity, the instrument rule prescribed by
Eq.(5) may not be transparent to financial markets and institutions, particularly when the
underlying forward-looking independent variables are highly unstable. Nevertheless, this
multifaceted rule seems to be a logical policy choice upon entry to the ERM2 framework, which
is required to be pursued by policy-makers for a two-year minimum period preceding the euro-adoption.
Prior to the ERM2-entry, policy-makers will be well-advised to adopt a simpler, more
transparent rule, such as the one prescribed by Eq.(4).
14
16. CASE Network Studies & Analyses No. 358
15
IV. Stability of the Input Variables
As argued above, the task of modeling an optimal open-economy convergence-consistent
instrument rule for monetary policy is challenging due to its functional complexity.
Before estimating robustness of the instrument rule consistent with Eq.(4) for the three selected
euro-candidate countries, it is helpful to analyze descriptive statistics of the underlying input
variables. In essence, effective implementation of a complex instrument rule that reflects open,
converging economy conditions depends on the stability and predictability of the variables used
in the instrument rule function. The variables shown in Table 1 include central bank reference
interest rates (two-week repo rates), CPI-based annualized inflation rates, local currency values
of the euro and annualized rates of monthly changes in the index of industrial output (as a rough
proxy of total output). The monthly series of observations for the Czech Republic, Poland and
Hungary capture the sample period that begins in January 1999 and ends in January 2008. The
earlier period is excluded due to its systemic inconsistency with the current policy and
exacerbated volatility of these variables in the presence of contagion effects from the Asian
financial crisis. These factors distort fundamental stability of these variables and introduce an
irrelevant bias for predicting their future path. The systemic inconsistency pertains to the
monetary regimes based on fixed exchange rates that prevailed in these countries in the 1990s
and that are fundamentally different from their current inflation targeting policies accompanied
by flexible exchange rates3.
3 The fixed exchange rate system was kept in the Czech Republic until mid-1997. The inception of inflation targeting
in January 1998 was accompanied initially by the managed float. Poland maintained a crawling devaluation system
with a wide band of permitted fluctuations until April 2000 when it moved to a pure float in consistency with the
inflation targeting policy that took effect in January 1999. Hungary pursued crawling devaluation with a narrow band
until October 2001, six months after enacting inflation targeting. Upon abandoning the crawling devaluation regime,
Hungary adopted an ERM2-shadowing policy, officially declaring a reference rate of HUF to the EUR. See for
instance Corker, et al., (2000), Jonas and Mishkin (2005), Roger and Stone (2005), and Orlowski (2005) for a
detailed discussion of the evolution of monetary policies and exchange rate regimes in these countries.
17. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
Table 1: Descriptive statistics for the variables in Eq.(4)
Czech Republic Poland Hungary
t i t π
t s t y t i t π
t s t y t i t π
t s t y
Mean
Standard deviation
Skewness
Kurtosis
3.54
1.64
0.80
2.60
2.57
1.53
0.20
2.46
31.84
3.06
0.25
2.04
6.78
5.28
-0.84
4.47
8.96
5.18
0.77
2.04
3.95
3.05
0.88
2.67
4.03
0.29
0.77
3.12
6.90
6.25
0.12
2.72
9.85
2.75
0.67
2.78
6.79
2.57
0.01
1.74
253.5
8.10
0.60
3.13
8.21
7.19
0.75
6.21
Linear time trend
coefficient
-0.04 -0.01 -0.09 0.09 -0.14 -0.07 -0.01 0.07 -0.07 -0.05 0.00 -0.04
ADF unit root -1.78 -2.58 0.17 -3.07 -1.08 -1.71 -1.66 -2.66 -2.33 -1.77 -3.22 -2.55
Notes: t i is the central bank reference rate (2-week repo rates), t π
t s
is one-year growth in CPI-based inflation, is
t y
local currency value of one euro, is one-year growth in index of industrial output; ADF is augmented Dickey-Fuller
unit root
τ -coefficient (McKinnon critical value at 5% is -2.88). ARMA(1,1) structure assumes no constant or time
trend. Sample period: January 1999-January 2008.
Data source: Czech National Bank, National Bank of Poland, National Bank of Hungary.
16
18. As shown in Table 1, central bank reference interest rates, as a dependent variable in
our exercise, have been the highest in nominal terms in Hungary and the lowest in the Czech
Republic. Real rates measured as a difference between the nominal rates and the average
inflation rates are by far the highest in Poland, indicating the most restrictive course of monetary
policy during the examined sample period. The standard deviation of reference rates as well as
the coefficient of variation (the average percentage variation around the mean) of reference
interest rates is the highest in Poland, indicating very active adjustments of the policy instrument
variable. In all three cases, distribution of interest rate data is right-skewed, suggesting
prevalence of their increases rather than cuts, as well as platykurtic indicating their large
dispersions from the mean. They are all non-stationary as implied by the absolute value of ADF
unit root statistics lower than the critical value for the tested sample period. Their linear trend is
mildly declining, which may suggest gradually improved policy credibility and gains in financial
markets confidence about the stabilizing impact of changes in the policy instrument.
The average inflation rate is the highest in Hungary and the lowest in the Czech
Republic. Evidently, Hungary faces a serious task of reducing inflation, as the main policy target
variable, to a low, sustainable level, thus also a challenge of improving stability of its financial
system. Although Poland’s inflation has been consistently low, it remains volatile, as implied by
its high standard deviation and coefficient of variation. Arguably, the risks associated with
inflation variability in Poland remain high. Variations of inflation rates are slightly right-skewed in
Poland and in the Czech Republic. They are symmetric in Hungary, which implies their steady
path at a consistently high level. The inflation rates are non-stationary in all three cases.
On the basis of the coefficient of variation, nominal exchange rates in all three countries
have been remarkably stable, in contrast to their widely-documented volatility during the periods
of the Asian and the Russian financial crises in the second half of the 1990s (Kočenda and
Valachy, 2006). Unlike in the Czech Republic and Poland, the Hungarian exchange rate is
stationary, which suggests a focus on exchange rate stability and active smoothing of exchange
rate variations by the NBH. This is also indicated by the stable linear path of the Hungarian
forint (HUF) value of the euro (EUR).
Changes in the industrial output are very volatile (in line with their intrinsic variability in
the majority of world economies). Therefore, empirical tests of a policy rule function ought to
include a smoothed-form of this variable. In contrast to its right-skewed pattern in Hungary and
Poland, fluctuations in the industrial output are left-skewed in the Czech Republic, for the
17
19. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
reasons yet to be investigated. Moreover, the Czech industrial output is stationary. During the
tested sample period, the linear trend of industrial output has been positive in the Czech
Republic and in Poland, but it negative in Hungary. The declining trend of industrial output in
Hungary is somewhat puzzling.
In sum, the key instrument (reference interest rate) and the input (independent) variables
embedded in Eq.(4) display mostly declining time-trends, thus show gradually increasing
stability. They are predominantly non-stationary, thus suitable for OLS regression only at their
first-differenced terms, which restore their stationary time trends.
Further insights on the stability and the time-varying volatility of the input variables that
are employed in our exercise are provided by the tests of their univariate auto-regressive
moving-average ARMA(1,1) structure with generalized auto-regressive conditional
heteroskedasticity with in-mean variance and generalized error distribution parameterization
GARCH(p,q)-M-GED4. The empirical results are shown in Table 2.
4 ARMA(1,2) without in-mean GARCH variance has been applied in the Czech case, as the base-line ARMA(1,1)
specification has provided inconclusive results.
18
20. Table 2: Time-varying volatility of the input variables – univariate ARMA(1,1) with
GARCH(1,1)-M-GED
Czech Republic Poland Hungary
t π
t s t y t π
t s t y t π
t s t y
Cond. mean eq.:
Constant term
AR(1)
MA(1)
MA(2)
GARCH variance
3.42***
0.93***
0.21***
0.15**
-
45.06**
1.01***
0.26***
-
0.03***
4.53
0.88***
-0.78***
-
-0.82
-39.13
0.99***
0.33***
-
-0.05*
2.97***
0.96***
0.36***
-
-0.01***
10.82***
0.084***
-0.37***
-
0.05***
1.17
0.97***
0.30***
-
-0.01
259.3***
0.88***
0.40***
-
0.48**
8.77***
0.94***
-0.54***
-
-0.01
Cond. variance eq.:
Constant
ARCH(1)
GARCH(1)
GED parameter
0.17***
-0.06**
0.37***
1.05***
0.05
0.06
0.58***
1.09***
7.75
0.10
0.26
1.69***
0.11*
0.30
0.16
1.19***
0.01***
-0.06***
-0.71***
1.14***
15.04***
0.55***
-0.34***
3.58***
0.29
0.05
-0.14
1.03***
8.41
-0.06*
0.34
1.24***
27.34***
0.57***
-0.23*
1.25***
Equation evaluation:
R 2
Log likelihood
SIC
DW
0.857
-66.58
1.566
1.61
0.980
-44.07
1.153
2.19
0.529
-287.2
5.664
2.09
0.975
-62.04
1.483
1.78
0.932
144.3
-2.304
2.03
0.537
-297.8
5.862
2.25
0.956
-73.44
1.692
1.93
0.801
-284.4
5.562
2.08
0.150
-333.9
6.530
2.63
Notes: t π
t s t y
is year-on-year CPI inflation, is local currency value of one euro, is annualized growth rate of index
of industrial output. Triple asterisk indicates 1%, double 5% and single 1% confidence level;
R 2 is adjusted R-squared;
SIC is Schwartz information criterion; DW is Durbin-Watson statistics. Sample period: January 1999-
January 2008.
Data Source: as in Table 1.
19
21. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
During the January 1999 – January 2008 period, a one-period transmission of MA
residuals or positive shocks inflation has been very pronounced in the Czech Republic and
somewhat weaker in the remaining two countries. The signs of the GARCH variance in the
conditional mean equation suggest a diminishing pattern of exchange rate risk only in the case
of Poland. In addition, the inflation GARCH variance (a proxy of time-varying inflation risk
premium) is declining only in Poland, while it is inconclusive in the Czech Republic and
insignificant in Hungary.
In the conditional variance equation, the negative ARCH(1) term for the Czech inflation
suggests corrective or offsetting responses to the shocks to volatility in the previous period. The
positive ARCH(1) terms for inflation in the remaining two countries would imply propagation of
previous-period shocks, but the obtained estimates are not significant. The ARCH(1) term for
the exchange rate is significant only in Poland, which is consistent with the pure float
mechanism prevailing there. Its negative sign suggests corrective appreciation of previous-period
local currency depreciation (or depreciation responding to a prior appreciation). The
GARCH(1) terms for the Czech and Polish inflation series are positive, implying inter-period
transmission of persistency in volatility. The same term is positive for the Czech and Hungarian
exchange rates. It has a negative value for the Polish exchange rate series, implying reverse
corrections to the persistency of volatility. It is worth noting that in all examined cases the sums
of ARCH and GARCH coefficients do not exceed unity, suggesting an ongoing compression of
volatility, or declining risk associated with the time-varying pattern of these variables. This is an
important finding for their expected stability in the future and, therefore, for feasibility of
application of a policy instrument rule that is based on these indicator variables. It shall be,
however, noted that higher order ARMA and GARCH terms would likely yield more robust
results, more suitable for forecasting purposes. Nevertheless, from the standpoint of
examination of time-varying properties of individual variables their simplified treatment provides
some useful information.
All examined input variables, except for the industrial output series in Poland, have
statistically significant GED parameters lower than 2, indicating a leptokurtic distribution of their
conditional volatility series. Thus evidently, inflation and exchange rate variations in all three
countries tend to oscillate around their mean values at tranquil periods, but they experience
excessive volatility during more turbulent times of financial instability. For practical reasons, it is
prudent to account for leptokurtic data distribution of the variables included in various
specifications of Taylor rule functions in order to disqualify a valid criticism of these rules
20
22. expressed by Svensson (2003). According to his argument, Taylor rules may be implausible to
implement and may misguide policy-makers during periods of financial turbulence, due to the
prevalent leptokurtic distribution of data for the variables included in these functions.
In sum, the degree of stability of the examined input variables in the three euro-candidate
countries is not uniform, which can be attributed to systemic differences in their
specific inflation targeting and exchange rate regimes. Nonetheless, the analysis of their ARMA
series with time-varying conditional volatility suggests that these variables are becoming
increasingly stable over time, which increases chances for a judicious implementation of the
prescribed instrument rule in these countries at the current stage of monetary convergence that
precedes the required entry to the ERM2.
V. Empirical Tests of Open-Economy Convergence-Consistent
Instrument Rule
In order to make the policy instrument rule more conducive to the current inflation-targeting
policies preceding the ERM2 entry, the functional relationship prescribed by Eq.(4) can be
modified into
~ ~ ~
t t t ( t t ) ( t t ) t i β β π β π β y y β s s μ τ τ τ τ τ τ = + + + − + − + + + + + + +
0 1 2 3 4 (6)
Such specification reflects stationary first-differenced changes in the central bank reference
interest rate as a function of: the long-term, or Wicksellian-neutral real interest rate 0 β equal to
rˆ + π , τ , t t + τ the predicted or observed inflation rate with the displacement parameter the
smoothed and forwarded inflation rate π ~ t+
τ as a proxy of a stable inflation target, deviation
between the observed and the smoothed growth rate of the index of industrial output, and the
difference between the actual and the smoothed (or ‘targeted’) exchange rate5.
The sample period for empirical testing of Eq.(6) remains to be January 1999-January
2008. The individual displacement parameters τ have been determined on the basis of the
5 Preliminary tests have also included as a regressor a binary variable denoting one for the period following the May
2004 EU accession and zero before, as well as the interaction variable between this binary and the change in CPI
inflation. These modifications have been insignificant in all examined cases. Evidently, the instrument rule has not
been altered since these countries joined the EU.
21
23. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
functional form of Eq.(6) for each tested case reaching a minimum Schwartz information
criterion. The results of the selected empirical tests are shown in Table 3.
Table 3: OLS estimation of instrument rule Eq.(6)
Dependent variable: change in the central bank reference interest rate
Czech Republic Poland Hungary
Constant term
π t+τ
~
τ π t+
t+τ y&
t+τ s&
-0.005 (-0.31)
τ = 0 ; 0.063 (1.89)**
τ = 1; 1.194 (5.21)***
τ = 2 ; -0.008 (-2.82)***
τ = 0 ; 1.728 (1.51)
0.010 (0.16)
τ = −1; 0.363 (3.97)***
τ = 0 ; 0.780 (1.32)
τ = 2 ; -0.009 (-0.95)
τ = 0 ; 1.238 (0.48)
-0.044 (-0.77)
τ = −1; 0.160 (1.66)*
τ = 0 ; 0.632 (1.27)
τ = 2 ; 0.006 (0.96)
τ = 0 ; 11.927 (3.38)***
R 2
Log likelihood
SIC
DW
0.290
56.30
-0.859
1.855
0.160
-63.73
1.423
1.906
0.112
-81.05
1.749
1.700
Forecast eval.
Theil U coeff.
Bias prop.
Variance prop.
Covariance pr.
0.081
0.015
0.084
0.901
0.213
0.450
0.374
0.175
0.082
0.005
0.019
0.976
Notes: all variables are in first differences; January 1999-January 2008 sample period; τ π t+ is year-on-year CPI
inflation with τ lag operator (displacement); τ π t+
~ is HP-filtered CPI inflation; is one-year growth rate industrial
t+τ y&
t+τ s&
output minus HP-filtered growth rate of industrial output; is log of actual exchange rate minus HP-filtered log of
exchange rate in local currency per EUR; t-statistics are in parentheses; triple asterisk indicates 1%, double 5% and
single 1% confidence level;
R 2 is adjusted R-squared; SIC is Schwartz information criterion; DW is Durbin-Watson
statistics.
Data Source: as in Table 1.
22
24. The empirical tests imply that adjustments in the Czech central bank reference interest rate are
driven predominantly by the change in the (HP-filtered) inflation forecast for at least one-period
ahead. The CNB seems also prone to reduce the reference rate in response to the expected
widening of the output gap, at least for the two-periods ahead. It does not react to the current or
to the expected path of the exchange rate, which suggests that the CNB allows the Koruna to
float freely, in spite of the ‘de jure’ declaration of the managed float.
The main driver of changes in the Polish central bank reference rate is the inflation rate
observed in the previous period. The forwarded inflation path, the output gap and the exchange
rate variables are all insignificant. It can be therefore argued that the NBP interest rate decisions
react mainly to recently observed changes in inflation and that the policy is consistent with the
officially declared clean-floating exchange rate regime.
In contrast to the implementation of inflation targeting policies in the Czech Republic and
Poland, the Hungarian monetary policy is geared predominantly toward exchange rate stability.
Recently observed changes in inflation play a secondary role, while the forward-looking inflation
path and the output gap seem unrelated to the NBH interest rate decisions.
The estimates shown in Table 3 may serve as a basis for predicting future adjustments
in central bank reference rates. The indicators of forecast accuracy and reliability reflect
consistency and predictability of monetary policy implementation. As indicated by the low values
of the Theil-U coefficients, the forecasts based on the examined instrument rule are accurate
both in the Czech Republic and in Hungary. In addition, these two forecasts are highly reliable
since the sum of the bias and the variance proportion coefficients is very small in relation to the
covariance proportion. This is not the case for Poland. The forecast based on its reference rate
is less accurate due to the higher Theil-U coefficient, and highly unreliable due to the low
covariance proportion. Thus arguably, adjustments in the NBP reference rate have not followed
a pattern consistent with the instrument rule prescribed by Eq.(6). In contrast, consistency of
interest rate policy is proven to be the case in the Czech Republic and in Hungary whose
forecasts are accurate and reliable. Nevertheless, the CNB and the NBH monetary policies
follow a different set of preferences, as discussed above.
23
25. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
Figure 1a: Recursive residuals test for OLS regression shown in Table 3 – The Czech
Republic
.6
.4
.2
.0
-.2
-.4
-.6
2000 2001 2002 2003 2004 2005 2006 2007
Recursive Residuals ± 2 S.E.
The inconsistency of Poland’s monetary policy with the examined instrument rule
prevailed mainly during the first four years of the analyzed sample period, i.e. from 1999 until
2002, as shown by the recursive residuals in Figure 1b. Since 2003, the dispersion of the
residuals obtained from the functional relationship examined in Table 3 has been considerably
tamed. The plus-minus two standard error band has been narrowing since then, suggesting
that the instrument rule is now followed by the NBP more closely than before. The dispersion of
residuals in Poland is now comparable to that of the Czech Republic (Figure 1a). The time-varying
path of the residuals in Hungary (Figure 1c) shows a major turbulence in 2003, which is
presumably associated with the elevated political risk and market instability during the period
preceding the stormy Parliamentary election accompanied by the deterioration of fiscal
discipline (Darvas and Szapáry, 2008).
24
27. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
Figure 1c: Recursive residuals test for OLS regression shown in Table 3 – Hungary
3
2
1
0
-1
-2
97 98 99 00 01 02 03 04 05 06 07
Recursive Residuals ± 2 S.E.
Data source: as in Table 1.
VI. A Synopsis and Policy Recommendations
Devising a monetary policy instrument rule for open-economies undergoing convergence
to a common currency system whose monetary policies are based on inflation targeting is a
complex task. A simple instrument rule in its original form advanced by Taylor (1993) does not
adequately reflect hybrid, at times exclusive and contradicting policy objectives for these
economies that include: price stability, exchange rate stability, convergence to the common
currency area interest rates and, in general terms, integration with global financial markets
(Jonas and Mishkin, 2005; Orlowski, 2005 and 2008). This study proposes several
parsimonious models of policy instrument rules that seem conducive to the conditions of
converging economies. Among them are an open-economy instant target interest rate rule
26
28. and a market-forecast rule. For the EU Member States undergoing convergence to the euro, a
more complex a projected interest-rate rule that is consistent with the Maastricht convergence
criteria is a viable policy option, particularly upon the entry to the ERM2. However, its
implementation might be difficult to achieve, due to the assumption of several policy objectives
that might be exclusive, particularly in the presence of global financial instability.
In consistency with the proposed instrument rules conducive to convergence to the euro,
further modifications of current monetary policies of the Czech Republic, Poland and Hungary
seem to be necessary. Due to systemic differences between these inflation targeting policies,
there is no uniform policy prescription. However, some general guidelines can be specified
based on the proposed models for instrument rules. In particular, monetary policies of the euro
candidates ought to be forward-looking, geared toward balancing low inflation and exchange
rate stability objectives.
The empirical tests of the policy rule prescribed by Eq.(6) imply that the CNB policy is
the closest to our assumptions and recommendations. The policies of the NBP and the NBH
ought to be modified for the purpose of pursuing monetary convergence to the euro more
effectively. In particular, the NBP will be well-advised to focus on forward-looking inflation
expectations with a gradually increasing attention to the exchange rate stability. In contrast, the
weighting of the NBH policy decisions ought to be shifted toward price stability and forward-looking
inflation expectations. In all three cases, the leptokurtic distribution of almost all
variables included in our model implies that a policy instrument rule might be very difficult to
implement in the presence of global financial market instability and elevated market risk. For
these reasons, some flexibility in adherence to the Maastricht convergence criteria should be
allowed.
27
29. Lucjan T. Orlowski, Monetary Policy Rules for Convergence to the Euro
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