The Baltics: Continuing Boom or Bursting Bubble?

Since the late 1990s, the economies of Estonia, Latvia and Lithuania have experienced unprecedented economic growth, which has attracted a large number of foreign investors. American companies were among the first to seek business opportunities and have invested over $1 billion in the three countries as of 2008. However, the boom—partly financed on a loose credit policy—has recently created a fragile economic situation due to soaring wages, double-digit inflation, and high current account deficits. The resulting economic deceleration in the first half of 2008 has led analysts to comment that the “Baltic Bubble” is about to burst, potentially leading to a long-term recession. Other experts, nevertheless, maintain that the three countries are only experiencing a natural consolidation, which does not seriously endanger business opportunities in the long run. The purpose of this paper is to analyze the current condition of the Baltic economies and the environment for businesses there in order to determine if the three countries will still be attractive destinations for foreign direct investment (FDI) in the future.     

„Problemsucher,Problemfinder und Problemlöser in einem sind gefragt“

Ohne Zusammenfassung Dr. Matthias Salge (43) leitet seit 2004 das operative und strategische Controlling der Volksfürsorge. Davor war er in der Corporate-Finance Beratung der Wirtschaftsprüfungsgesellschaft PricewaterhouseCoopers sowie bei der Frankfurter Allianz als Vorstandsassistent und im Vertrieb t?tig. Er hat an den Universit?ten G?ttingen, Kiel und Barcelona Volkswirtschaftslehre studiert und über ein kapitalmarkttheoretisches Thema an der Universit?t Kiel promoviert. Daniele Baldino (32) leitet seit 2005 im Controlling der Volksfürsorge die Abteilung Strategisches Controlling. Die berufliche Laufbahn in der AMB Generali Gruppe begann er 2002 als Vorstandsassistent, zun?chst in der Volksfürsorge, anschlie?end in der Konzernzentrale. Davor war er in der KPMG Unternehmensberatung sowie im Private-Equity-Umfeld t?tig. Baldino hat European Business Studies (EBS) in Regensburg studiert mit Aufenthalten in Frankreich und Gro?britannien.     

Subjective versus normative evaluation of housing quality

The decision to rent or buy a certain apartment is one of the most momentous choices a typical consumer can make. Both he and the architect who designed the dwelling would thus be helped a great deal if we could objectively measure housing quality. But apartments are highly complex products, too, and individual preferences may vary considerably, precluding any uniform evaluation. This study compared evaluations of apartment floor plans by three published normative systems with subjective preference rankings given by a sample of interviewees. Results showed respondents' rankings to be remarkably stable even over a 1-year interval. Inter-rater-agreement was slight. Mean agreement with even the best of the systems was rather modest. In addition, the three systems achieved less than perfect or even zero agreement among themselves. It is tentiatively concluded that normative evaluation of housing quality is a more or less futile endeavour. Alternative approaches are briefly discussed.     

Causal relations between inflation and inflation uncertainty—Cross sectional evidence in favour of the Friedman-Ball hypothesis

We test for causality between inflation and its associated uncertainty by means of both in-sample and out-of-sample modelling. Our findings indicate that the impact of inflation on inflation uncertainty is more pronounced than the reverse causal effect.     

Managing financial market expectations: The role of central bank transparency and central bank communication

In this paper, we study the influence of central bank transparency and informal central bank communication on the formation of money market expectations. The sample covers nine major central banks from January 1999 to July 2007. We find, first, that transparency reduces the bias in money market expectations and dampens their variation. Second, informal communications help manage financial market expectations by reducing the variation of expectations. Third, various subcategories of the Eijffinger and Geraats (2006) transparency index lead to a smaller bias in expectations (in particular, evaluation of policy outcome and explanation of interest rate decisions) and to a reduction in the variation of expectations (in particular, explicit prioritization of objectives and provision of information on unanticipated macroeconomic disturbances).     

Learning or lock-in: Optimal technology policies to support mitigation

We investigate conditions that amplify market failures in energy innovations, and suggest optimal policy instruments to address them. Using an intertemporal general equilibrium model we show that ‘small’ market imperfections may trigger a several decades lasting dominance of an incumbent energy technology over a dynamically more efficient competitor, given that the technologies are very good substitutes. Such a ‘lock-in’ into an inferior technology causes significantly higher welfare losses than market failure alone, notably under ambitious mitigation targets. More than other innovative industries, energy markets are prone to these lock-ins because electricity from different technologies is an almost perfect substitute. To guide government intervention, we compare welfare-maximizing technology policies including subsidies, quotas, and taxes with regard to their efficiency, effectivity, and robustness. Technology quotas and feed-in-tariffs turn out to be only insignificantly less efficient than first-best subsidies and seem to be more robust against small perturbations.     

The Relationship Between Leaders’ Group-Oriented Values and Follower Identification with and Endorsement of Leaders: The Moderating Role of Leaders’ Group Membership

In this article, we hypothesize that leaders who display group-oriented values (i.e., values that focus on the welfare of the group rather than on the self-interest of the leader) will be evaluated more positively by their followers than leaders who do not display group-oriented values. Importantly, we expected these effects to be more pronounced for leaders who are ingroup members (i.e., stemming from the same social group as their followers) than for leaders who are outgroup members (i.e., leaders stemming from a different social group than their followers). We tested our hypotheses in two studies. Results of a field study (N = 95) showed the expected relationship between leaders’ group-oriented values and followers’ identification with their leaders. A scenario study (N = 137) replicated the results and extended it to followers’ endorsement of their leaders. Overall, these findings suggest that displaying group-oriented values pays off more for ingroup than for outgroup leaders.     

Spread ladder swaps—an analysis of controversial interest rate derivatives

This article analyzes spread ladder swaps traded by Deutsche Bank to several medium-size companies and municipalities. The value of these contracts is highly sensitive to correlations between forward rates. For a contract that was challenged by the medium-size company Ille at the Federal Court of Germany, it turns out that the derivative was originated at a negative market value of −90,000 to −115,000 euros (depending on the number of factors used in the model). Moreover, the model correctly predicts the range for the terminal payment after an adverse development of the term structure of approximately 567,000 euros. We also investigate a product feature that limits the upside potential from the viewpoint of the customer and show that it has a substantial impact on market values. According to the judgment handed down by the court, the bank should have informed the customer about the market value of the product in light of special circumstances. This raises questions as to which products must meet this requirement. Moreover, especially for exotic contracts, market prices are mostly model prices: for spread ladder swaps, substantially different prices are obtained even when investors agree on the variance/covariance matrix but disagree on the number of factors to apply in an implementation of a model.