Buy-outs in Hungary,Poland and Russia: governance and finance issues1

The governments of Hungary, Poland and Russia have used buy-outs as an important privatization strategy which can be viewed as forming a continuum from straightforward sales where management and employees generally achieve significant ownership, as in Hungary, via intermediate approaches as in Poland where both payment and free distribution of shares are involved, to the Russian case where state-owned enterprises were effectively “given away” through a voucher privatization scheme. This paper, first, presents preliminary evidence on the extent and nature of post-privatization restructuring in buy-outs in these three countries, which highlights the transitory nature of this form of organization. Second, in the light of these findings, the paper analyses the possibilities and difficulties associated with enhancing corporate governance and finance.     

Growth-returns nexus: Evidence from three Central and Eastern European countries

Using a sample of monthly data from January 1996 to December 2012, we provide new evidence on the unidirectional Granger causality from real stock market returns to real economic activity in three Central and Eastern European countries: the Czech Republic, Hungary, and Poland. By employing the Granger causality tests of Cheung and Ng (1996) and Hong (2001), we show evidence of short-term (up to 6 months), medium-term (up to 12 months) and long-term (up to 24 months) causality for the Czech Republic and Hungary. In the case of Poland, only medium-term and long-term causality is found. Using rolling-correlation analysis, we find that although the growth–returns relationship is positive during the examined period, there is an apparent variability in the strength of this relationship that is particularly visible during the period of the financial crisis in the late 2000s. Consequently, we find that the predictive power of stock markets in the CEE-3 countries increases during periods of high market volatility and decreases during periods of economic recovery.     

Empirical evaluation of nominal convergence in Czech Republic, Poland and Hungary (CPH)

We estimate a four variable structural vector auto regression (SVAR) model of the Czech Republic, Poland and Hungary economies in order to evaluate the links between the instruments of monetary policy and inflation outcomes. We find that the linkages between the interest rates and price levels are weak. However, the exchange rate constitutes the most important channel of monetary policy transmission for Poland and Hungary. For the Czech Republic, the link between interest rate rise and price level is rather indirect.     

EMU-related news and financial markets in the Czech Republic,Hungary and Poland

We analyse the impact of news on five financial markets in the Czech Republic, Hungary and Poland using a newly constructed data set in a Generalized Autoregressive Conditional Heteroscedastic (GARCH) framework. Macroeconomic shocks (on Gross Domestic Product (GDP), inflation rate, current account and trade balance) are constructed as deviations from expected values. Economic and Monetary Union (EMU)-related political and fiscal news is captured as news dummies. Macroeconomic shocks significantly affect short-term interest rates and, to a lesser extent, other financial variables. Political and fiscal news has an impact on long-term bond yields and exchange rates. News displayed prominently in our media sources has a greater impact on financial markets than other news and, in addition, the sources of news themselves matter. We also discover asymmetric effects of news within markets. Finally, using a pooled GARCH model we find that macroeconomic shocks have the strongest impact on financial markets in Hungary, while political news has the largest influence in both Hungary and Poland.     

The sustainability of the current account in the Czech Republic,Hungary and Slovenia

The aim of this paper is to investigate empirically the sustainability of the current account in three Central European countries, the Czech Republic, Hungary and Slovenia, since their move towards market economy about 15 years ago. The analysis is based on the intertemporal approach to the current account which states that if real exports and real imports are integrated of order one then cointegration between them is a necessary and sufficient condition for the economy to satisfy its intertemporal budget constraint. On the basis of various unit-root and cointegration tests on the shares of real exports and imports in real GDP, this study concludes that the Czech Republic and Slovenia are not in violation of their intertemporal budget constraint and their trade imbalances are sustainable. However, the real exports and imports of these countries, and also the export, import measures of Hungary, do not seem to behave as random walks, excluding the possibility of cointegration between them.      

Opening up for foreign banks: How Central and Eastern Europe can benefit1

This paper analyses the role of foreign banks in the Czech Republic, Estonia, Hungary, and Poland. With respect to their planned EU membership, these countries have to consider the full implementation of free trade in financial services. Generally, liberalizing the market access of foreign banks allows the production of financial services according to comparative advantage, it fosters competition, it promotes bank privatization, and it facilitates a transfer of know-how into the emerging financial systems. The most important sequencing issue that arises is that the incumbent banks should have been recapitalized for their truly inherited bad loans before markets are opened up. In view of the reform progress that has already been made in the countries under review, abolishing remaining entry barriers is unlikely to put the stability of banking systems at risk while allowing the benefits of open markets to be exploited.     

Real exchange rates,economic performance,and trade balances in the central european free trade association

The relationships between real exchange rates dynamics, domestic economic growth, and external economic positions are examined for four East European countries: Poland, Hungary, Slovakia, and the Czech Republic. Results show that in Poland the dynamic of the trade balance is independent of both the real exchange rate and industrial production. In both Hungary and Slovakia, trade balances appear to have strong autonomous components, albeit in circumstances where the influence of real exchange rates and industrial production dynamics cannot be entirely denied. The Czech Republic's situation is, however, substantially different from its Central European Free Trade Assocation partners. The growing trade balance deficit appears to be determined by both the continuing real appreciation of the Czech currency and a mildly accelerating industrial production growth. Both are the consequence of accelerating capital inflow.     

Time-varying synchronization of European stock markets

We study intraday comovements among three developed (France, Germany, and the United Kingdom) and three emerging (the Czech Republic, Hungary, and Poland) European stock markets. When applying a Dynamic Conditional Correlation GARCH model to 5- min tick intraday stock price data (2003–2006), we find a strong correlation between the German and French markets and also between these two markets and the UK stock market. However, very little systematic positive correlation during a trading day can be detected between the developed and emerging stock markets, or within the emerging group itself. Hungary exhibits higher correlation with the developing markets and the emerging markets and its dynamics show an increasing trend; Poland and the Czech Republic produce less clear-cut results.     

Central banks' voting records,the financial crisis and future monetary policy

We examine whether central banks' voting records help predict the future course of monetary policy in the Czech Republic, Hungary, Poland, Sweden and the United Kingdom, controlling for financial market expectations. Unlike previous research, we first examine the period of the global financial crisis, characterized by a high level of uncertainty, and second, examine the predictive power of voting records over longer time horizons, i.e., the next monetary policy meeting and beyond. We find that voting records predict the policy rate set at the next meeting in all central banks that are recognized as independent. In some central banks, voting records are found—before, but not during, the financial crisis—to be informative about monetary policy at even more distant time horizons.     

Book Reviews

Books reviewed: Annette N. Brown, When Is Transition Over? Axel Siedenberg and Lutz Hoffmann, eds, Ukraine at the Crossroads. Economic Reforms in International Perspective Paul Cook, Colin Kirkpatrick and Frederick Nixson, eds, Privatization, Enterprise Development and Economic Reform Daniel Daianu, Transformation of Economy as a Real Process: An insider's Perspective Emil J. Kirchner, ed, Decentralization and Transition in the Visegrad: Poland, Hungary and the Czech Republic and Slovakia Johannes Stephan, Economic Transition in Hungary and East Germany. Gradualism and Shock Therapy in Catch-up Development Ivan Major, ed, Privatization and Economic Performance in Central and Eastern Europe: Lessons to be learned from Western Europe Jozef M. van Brabant, ed, Remaking Europe: The European Union and the Transition Economies Jenifer Piesse, Efficiency Issues in Transitional Economies: An Application to Hungary     

Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions

We study the transmission of monetary policy to macroeconomic variables with structural time-varying coefficient vector autoregressions in the Czech Republic, Hungary and Poland, in comparison with that in the euro area. These three countries have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that the impact on output of a monetary shock changed over time. At the point of the last observation of our sample, the fourth quarter of 2011, among the three countries, monetary policy was most powerful in Poland and not much less strong than the transmission in the euro area. We discuss various factors that can contribute to differences in monetary transmission, such as financial structure, labour market rigidities, industry composition, exchange rate regime, credibility of monetary policy and trade openness.     

Post-privatisation Enterprise Restructuring

Post-privatisation restructuring of former state-owned enterprises (FSOEs) encompasses both shorter-run 'defensive' actions and longer-run 'strategic' measures. Restructuring involves changes in corporate governance, organisational structure, management, labour, capital, technology, output and sales. Various performance indicators may measure the results of restructuring, but care is required in the selection and interpretation of indicators. In the restructuring of FSOEs foreign strategic investors have many advantages over domestic investors. The study includes examples from experience in the Czech Republic, Hungary and Poland.     

The impact of foreign macroeconomic news on financial markets in the Czech Republic, Hungary, and Poland

In this paper, we investigate the effects of euro area and US macroeconomic news on financial markets in the Czech Republic, Hungary, and Poland (CEEC-3) from 1999 to 2006. Using a GARCH model, we examine the impact of news on daily returns of 3-month interest rates, stock market indices, exchange rates versus the euro, and the US dollar. First, both US and European macroeconomic news has a significant impact on CEEC-3 financial markets. Second, the process of European integration is accompanied by an increasing importance of euro area news relative to US news. Third, there are country-specific differences: for example, the Czech stock market is relatively more affected by foreign news since the Copenhagen Summit in December 2002. In general, our results support the hypothesis of a deepening euro area influence on the CEEC-3 over time and a corresponding reduction in the relative importance of US shocks.     

Central Bankers and Central Bank Independence

This paper uses results of a questionnaire survey to look at how central bankers inthe Czech Republic, Hungary, Poland and Slovakia view various criteria of centralbank independence and compares their responses with central bankers in industrialcountries. Central bankers from both groups agree very strongly on the importanceof two pillars of central bank independence: goal independence and freedom toimplement these goals, together with a system of how credit is granted by a centralbank to a government that gives the central bank powers to determine terms andlimits the extent of such credit. Based on the responses, the paper also identifiessome weaknesses of the most frequently used indices of central bank independenceand makes recommendations on how to improve them.     

Lower coverage but stronger unions? Institutional changes and union wage premia in Central Europe

In this paper we use the national samples from the European Structure of Earnings Survey (ESES) to analyze the evolution of the wage premium of firm- and industry-level agreements in the Czech Republic, Hungary, and Poland (the CE3) around the time of their accession to the EU. We find that despite a generalized reduction in union coverage in these countries, the union wage premium after accession to the EU became bigger and statistically more significant for Poland and Hungary, particularly for industry-level agreements. We interpret these findings in terms of the institutional reforms that occurred in the CE3 between 2002 and 2006. These reforms, which were prompted by the EU Commission's requirements for EU accession, increased the social partners' ability to bargain and enforce wage agreements, and made industry-level unions more effective in guaranteeing the protections provided by labor standards. Results are less conclusive for the Czech Republic, probably due to factors that attenuate the effect of bargaining coverage upon wages, e.g. a smaller effect of institutional reforms, a greater use of mandatory extension mechanisms, the more radical firm restructuring during transition in that country.     

Municipal Finance in Poland,the Slovak Republic,the Czech Republic and Hungary: Institutional Framework and Recent Development

The recent process of political and economic transition in eastern European countries has not only contributed to the decentralisation of political structure but also significantly enhanced the fiscal autonomy of municipalities in these countries. In this context many similar types of public activities have recently been assigned to local governments, and some taxes were also declared to be local taxes. To be sure, this type of fiscal decentralisation has caused some additional problems, particularly for safeguarding the quality of publicly provided goods and services and for co-ordinating intergovernmental fiscal transfers between the central and local governments. For instance, some criticise that many small-sized municipalities in the transition economies have suffered from financial bottlenecks and have not been able to receive sufficient financial support from the central government. However, such a fiscal devolution trend appears to continue. This study primarily deals with issues surrounding the impact of national fiscal policy and the regulatory framework on local governments' expenditure behaviour and their ability to mobilise necessary revenues under the particular consideration of the institutional and administrative co-operation with the central government and of the less well-developed financial market in Poland, the Slovak Republic, the Czech Republic and Hungary.     

Transmission of Nominal Exchange Rate Changes to Export Prices and Trade Flows and Implications for Exchange Rate Policy*

We discuss how the welfare ranking of fixed and flexible exchange rate regimes in a New Open Economy Macroeconomics model depends on the interplay between the degree of exchange rate pass‐through and the elasticity of substitution between home and foreign goods. We identify combinations of these two parameters for which flexible and fixed exchange rates are superior with respect to welfare as measured by a representative household's utility level. We estimate the two parameters for six non‐EMU European countries (Czech Republic, Hungary, Poland, Slovakia, Sweden, and the UK) using a heterogeneous dynamic panel approach.     

European integration and the legacy of the post‐world war II German expulsions in East‐Central Europe

Efforts towards the formal integration of Poland and the Czech Republic into the European Union have opened the Pandora's box of issues concerning the expulsion of Germans and the confiscation of their property after the Second World War. This paper explains why Sudeten German expellees have been at the forefront of the drive for compensation and property restitution and why Czech‐German relations have been significantly more strained after 1989. As Poland and the Czech Republic prepare to join the EU, the potential for controversy over the involvement of European‐wide institutions in lingering disputes concerning the expulsions as well as over Germans acquiring property in areas formerly part of Germany is also a focus of concern.     

The Relationship Between Economic Factors and Equity Markets in Central Europe

This paper investigates the possibility that newly-emerging equity markets in Central Europe exhibit semi-strong form efficiency such that no relationship exists between lagged values of changes in economic variables and changes in equity prices. We find that while there are connections between the real economy and equity market returns in Poland and Hungary, these links occur with lags, suggesting the possibility of profitable trading strategies based on public information and rejecting semi-strong efficiency. For the Czech Republic the situation is more complex. In recent periods, little connection exists between lagged economic variables and equity market returns. Although this finding might be viewed as consistent with semi-strong efficiency, in fact there is also little connection between current economic values and stock prices in the Czech Republic. Thus, instead of processing information efficiently, the Czech market appears to be entirely divorced from the real world. It is suggested that the difference in the current status of these markets may be due to the different methods by which they were created.