Interest-rate volatility and volatility spillovers in emerging Europe

While many transition economies – particularly those that hope to join the Euro – have seen their economies converge to Europe’s, this process is by no means complete. Considerable macroeconomic volatility persists. This study examines the variability of the short-term nominal interest rates of ten transition economies, finding that eight of them exhibit time-varying volatility that can be modeled as a GARCH or Exponential GARCH process. Incorporating various measures of external volatility into the models, we find that those economies with fixed or managed exchange rates tend to experience more volatility spillovers, particularly from the Eurozone, regardless of the degree of transition. Only Estonia has a fixed exchange rate and remains free of international contagion.     

Capital Flows, Capitalization, and Openness in Emerging East Asian Economies

We examine the international capital flows of seven East Asian emerging economies over the last decade and a half. We find that domestic capital market conditions appear to be the best predictors of the changes in the total capital flows of these countries. Overall, changes in capital market openness are less helpful in explaining the behavior of the recent capital flows of these economies. Finally, we find that, while US macroeconomic conditions are strong predictors of GDP growth in the region, US conditions matter very little for the region's capital flows.     

Determinants of cross‐border bank acquisitions in transition economies1

We analyse the microeconomic determinants of cross‐border bank acquisitions in 11 transition economies over the period 1992–2006. We find that foreign banks target relatively large and efficient banks when they enter transition economies with weak institutions. This evidence provides support for the ‘market power’ hypothesis. However, when foreign banks enter more developed transition economies that have made progress in economic reform, they acquire less efficient banks. This result is in line with the efficiency hypothesis. We use a multilevel mixed effects logit model that allows us to explicitly incorporate the macroeconomic and institutional heterogeneity of the transition economies into our analysis.     

The Effects of Macroeconomic Policies in a Mercantilist Economy

By introducing money and foreign exchange in the Zou (1997) model of mercantilism, the paper shows the effects of macroeconomic policies in mercantilist economies. It is shown that in the long run, consumption and foreign asset accumulation increases as a result of stronger mercantilist sentiments, permanent increases in the consumption tax, increases in the monetary growth rate and purchases of foreign bonds. In the short run, however, macroeconomic disturbances including the mercantilist sentiments, the monetary growth rate, and the consumption tax have negative effects on current consumption and positive effects on current foreign asset accumulation, while purchasing foreign bonds has positive effects on both current consumption and current foreign asset accumulation. The theoretical explorations may provide a theoretical structure for hoarding international reserves and export-led growth strategy utilized by emerging market economies.     

The choice of exchange rate regime: An empirical analysis for transition economies*

We analyze the choice of exchange rate regimes of the 25 transition economies in Europe and the CIS after 1990. The empirical results show that the traditional Optimum Currency Area considerations provide relevant guidance for the regime choices in these countries. Moreover, regime choices are influenced by inflation rates, cumulative inflation differentials, and international reserves sufficiency. That is, macroeconomic stabilization and the ability to commit to exchange rate pegs also play important roles. Large government deficits have ambiguous effects; they increase the likelihood of moving from flexible to intermediate regimes as well as that of moving from fixed to intermediate ones.     

The role of international reserves holding in buffering external shocks

An extended literature analyses the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s. Empirical studies on the self-insurance motive suggest that high-reserves economies are more resilient to financial crises and to international capital inflows volatility. They show also that pre-crisis foreign reserve accumulation explains post-crisis growth. However, some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear, meaning that reserve holding is subject to diminishing returns. This article devotes more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks. For a sample of nine emerging economies, we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap. While a major part of the literature focuses on the global financial crisis, we investigate this question by considering two sub-periods: 1995–2003 and 2004–2013. We implement threshold VAR model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold. We find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time. Hence, the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified.     

Global trade flows and economic policy uncertainty

ABSTRACT

This article investigates the impacts of economic policy uncertainty (EPU) on global trade flows in gauging international trade developments. We employ a global vector autoregressive (GVAR) trade model, augmented with value-added bilateral trade linkages, that allows for quantifying the effects of economy-specific uncertainty shocks on exports and imports of individual economies. We find substantial spatial propagation in the temporal dynamics of international transmission of shocks amidst the manifestations of cross-border global value chains (GVCs) with China’s accession into the WTO. We provide evidence for the significance of EPU of China and the United States, particularly the latter, in influencing global trade flows. Our results show that while the US impacts can largely be attributed to its indirect trade linkages with other economies, the impacts of China can be relegated more to its direct GVC linkages. The findings have implications on trade protectionist inclinations of the current-term US government and the ongoing efforts of China’s policymakers in steering macroeconomic rebalancing for sustainable growth.     

Output decline and recovery in the transiton economies: causes and social consequences1

This paper suggests that output in the transition economies of eastern Europe and the countries of the former Soviet Union is related to, firstly, macroeconomic stabilization, and secondly, the speed of transition. The statistical analysis suggests that those countries which have been most successful in reducing inflation have experienced a lower level of output decline and have been first to achieve recovery in real output. There is also strong evidence that the economies which have been boldest in adopting reforms have been most successful in limiting the fall in output and promoting growth. No support is found for the assertion that the faster the speed of transition the greater the adverse impact on basic social indicators, such as mortality rates.     

The illusive quest: Do international capital controls contribute to currency stability?

We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the likelihood of currency crises using standard macroeconomic variables and a probit equation estimation methodology with random effects. We employ a comprehensive panel data set comprised of 69 emerging market and developing economies over 1975–2004. Both standard and duration-adjusted measures of capital control intensity (allowing controls to “depreciate” over time) suggest that capital controls have not effectively insulated economies from currency crises at any time during our sample period. Maintaining real GDP growth and limiting real overvaluation are critical factors preventing currency crises, not capital controls. However, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation, making countries more vulnerable to changes in fundamentals. Our model suggests that emerging markets weathered the 2007–2008 crisis relatively well because of strong output growth and exchange rate flexibility that limited overvaluation of their currencies.     

The impact of macroeconomic factors on income inequality: Evidence from the BRICS

In this paper we investigate how the evolution of income growth, real interest rates, and inflation have driven income inequality across a variety of countries with particular focus on the BRICS economies (Brazil, Russia, India, China, and South Africa) during the period 2001 to 2015. Our work suggests that, when central banks of the BRICS economies use monetary policy for macroeconomic stabilization, they need to consider the impact monetary policy changes have on the distribution of income in their nations. Our estimates reveal that the unintended consequence of policies that induce economic growth and higher prices is higher income inequality. We find that the positive relationship between the three macroeconomic variables and income inequality for the BRICS economies is stronger during the post-2008 period.     

Assessing Recent Determinants of Borrowing Costs in Sub‐Saharan Africa

This study explores macroeconomic implications of the sovereign bond rush that has been taking place in sub‐Saharan Africa since 2006. The focus is on the sub‐Saharan sovereign bond yields as proxies for the region's ability to raise new funds on international markets. Despite the subcontinent's tour‐de‐force entrance to the international bond market, this paper reveals that recent (since early 2000s) borrowing in foreign currency is not without macroeconomic risk. Empirically this paper finds that sovereign bond yields are significantly influenced by global volatility, commodity prices and global liquidity—all factors that are out of the control of the sub‐Saharan economies in question. These findings suggest that portfolio repositioning by institutional investors prompted by improved growth prospects and implicit monetary policy tightening in the advanced economies or heightened risk perceptions, are likely to result in increased borrowing costs for the sub‐Saharan bond issuers and affect their ability to raise funds in international markets. Furthermore, a change in borrowing costs might lead to higher debt‐service costs and policy uncertainty, which in turn could lead to suboptimal investment levels and, ultimately, hinder economic development.     

Oil dependency and exchange rate regimes in Arab oil economies: time to rethink the paradigm

This study examines implications of the current exchange rate regimes on the macroeconomic and growth performance of five Arab oil-producing countries: Saudi Arabia, the UAE, Sudan, Algeria and Yemen. The study evaluates alternative exchange rate regime policy options towards exploring an optimal exit strategy to ensure successful transition to more sustainable exchange rate regime, especially in the fixed regime economies of Saudi Arabia and the UAE. This study proposes the adoption of a transparent broad basket, band and crawl (BBC) regime by the Arab oil economies in order to provide a better alternative to the existing fixed pegs or dirty floats. However, it is imperative to note that, the timing of the exit from the current regime and the extent of institutional development and market sophistications are very critical to successful transition to more sustainable regime that would provide a larger scope for counter-cyclical policies and diversification in these economies.     

Asia's Decoupling: Fact,Fairytale or Forecast?

Standard measures of economic co‐movement between Asia‐Pacific economies and those elsewhere had been observed to follow a downward trend, leading some commentators to suggest that the region was decoupling. However, this process reversed in response to the 2008 international financial crisis, and co‐movement increased to historically high levels for some economies. We examine co‐movement patterns and show that these are very sensitive to changes in macroeconomic volatility over time. Controlling for this, however, co‐movement is closely linked to underlying trade and financial integration. If international links continue to strengthen in future, co‐movement will strengthen in tandem. Decoupling is more a fairytale than a fact or a forecast.     

未来十年我国旅游增长空间研究及其数量预测

未来十年将是我国旅游业的战略转型期，是我国建设世界旅游强国的关键十年，将迎来若干个非线性增长的拐点因素。未来十年，宏观经济持续增长，收入增长、社会结构与消费结构的变化，旅游发展阶段性的跨越，国家层面重大举措的拉动，和平的国际环境的拉动，重大国际盛事的拉动，新业态的拉动，我国旅游产业环比增长率基数将达到12％～16％，到2015年旅游总收入将实现倍增计划。     

On the Transmission Mechanism of Monetary Constraints to the Real Side of the Economy

Contrary to the predictions of the theory underlying international finance, inflows of capital triggered by financial liberalisation have neither equalised real interest rates nor increased income growth in many emerging economies. We explain this puzzle by developing a model that combines the balance‐of‐payments constraint approach to economic growth with a less stringent version of the real interest rate parity hypothesis. The model’s foundations are based on robust empirical findings or well‐established macroeconomic models. We show that a perverse combination of income elasticities of demand for imports and exports generates slow income growth and high real interest rates. As domestic income grows and imports rise faster than exports, the real exchange rate is expected to depreciate in order to clear the balance of payments (or the foreign exchange rate market). An incipient capital outflow arises and interest rates increase. Faster adjustment in capital rather than in the goods market therefore generates a higher real interest rate differential between the domestic small open‐economy and the rest of the world. The long run analysis shows that a constant degree of risk aversion implies a positive equilibrium real interest rate differential that affects economic growth. A permanent increase in default risk driven by persistent current account imbalances thus impacts on long run growth. The model’s results are illustrated with evidence from the three major Latin America economies: Argentina, Brazil and Mexico.     

Self-serving dictators and economic growth

We study the effect of fair institutions on growth. In our model, individuals are endowed with unequal entitlements to the economy's output. They can free-ride or cooperate. Cooperation is individually costly, but increases aggregate output and growth. Experimentally, we observe significantly less cooperation, when dictators chose high instead of low inequality. This effect is not observed when the degree of inequality is chosen randomly. Simple cross-country regressions provide basic macroeconomic support for interaction effects between the degree and the genesis of inequality. We conclude that economies granting equal opportunities are less likely to suffer retarded growth due to free-riding than economies with self-serving dictators.     

Macroeconomic variables and the sovereign risk premia in EMU,non-EMU EU,and developed countries

This project studies and models key macroeconomic variables and their impact on sovereign risk premia across select European economies and developed countries. The sample is divided into three groups of countries: those in the European Monetary Union (EMU); the standalone economies outside the EMU but members of the broader European Union (EU); and other developed economies. The main subject of examination across all three groups is the impact of macroeconomic variables on sovereign borrowing costs. EU countries have experienced high financial stress and a rapid rise in the credit default swaps (CDS) spreads during the EMU debt crisis. A nonlinear vector smooth transition autoregressive model is applied to investigate such a regime change in the finance-output link using sovereign CDS and industrial production index. The paper finds that regime-switching takes place rather suddenly in most EMU countries. The study concludes that due to the potential spillover effects in the EU as a whole, the individual country macroeconomic indicators were less reflected in the financial stress and spillover and contagion effects became dominant.     

Market power and efficiency

This paper introduces new measures of the mean and variance of inflation and growth expectations, based on tendency survey data from four major European economies. The expectations measures are technically ‘irrational’, but more accurate than naive alternatives; expectations errors do not persist for more than a year. Unexpected inflation, and uncertainties about inflation and growth, play the roles assigned them by New Classical macroeconomic theory, respectively raising and lowering real activity. All the expectations, uncertainties and errors appear more closely correlated across countries than experience would justify, suggesting that unpredictable disturbances typically have an internal rather than an international origin.     

Choosing sides in the trilemma: international financial cycles and structural change in developing economies

ABSTRACT

This paper analyzes the impact of international financial cycles on structural change in developing economies. It is argued that the impact of these cycles depends on the specific combination of macroeconomic and industrial policies adopted by the developing economy. The cases of Brazil and Argentina are contrasted with those of Korea and China. In the Asian economies, macroeconomic policy has been a complementary tool along with industrial policy to foster the diversification of production and capabilities. Inversely, in the case of the Latin American countries, long periods of real exchange rate (RER) appreciation, combined with the weaknesses (or absence) of industrial policies, contributed to the loss of capabilities and lagging behind.     

开放经济条件下货币政策分析框架的选择

作为封闭经济条件下IS-LM模型和IS-LM-AS模型在开放经济中的拓展,M-F模型和M-F-D模型成为20世纪60—90年代开放经济宏观经济分析的工作母机。在研究开放经济中的货币问题时,M-F和M-F-D模型由于其简单明了、易于处理等优点,仍然是优先的分析工具选择。而作为M-F和M-F-D模型的新近发展,新开放经济宏观经济学框架在目前来说还难以运用于转型经济的货币政策研究。