The Short‐term Determinants of Capital Flows for a Small Open Economy: The Case of Greece

This paper presents the factors driving capital flows inwards and outwards of a small open economy such as Greece during the period 1983–2009. Apart from the determinants of capital flows the possibility of speculative attacks is also considered. Applying the ordinary least squares (OLS) method it is found that variables linked to external factors such as the differential of domestic and foreign interest rates and financial crises, such as the Asian and Russian financial turmoil of 1997 and 1998 respectively, are the main factors influencing capital inflows and outflows in Greece during the period 1983–2009. Additionally the results of probit analysis support that the same factors are significant in determining the probability of speculative attacks to the Greek economy.     

A model of exchange rate policy: evidence for the US dollar–Greek drachma rate 1975–87

This paper represents an attempt to model movements of the exchange rate between the US dollar and Greek drachma. A stuctural model is set up, and then a reduced-form error correction(EC) speicifcation is derived. On the basis of co-integration test, the results do not support the existence of al long-run equilibrium relationship between the exchange rate and price differential. Furthermore, the instrumental variable estimation of the EC model indicates that the monetary authorities have pursued a short-run anti-inflationary exchange rate poilicy that appreciates the exchange rate in the presence of wage inflation as an attempt to mitigate the depreciating pressures on the domestic currency and thus to ease the adjustment required on Greek producers.     

On the Linkages of the Stock Markets of the NAFTA Countries: Fundamentals or Speculative Bubbles?

We analyze whether the linkages between the stock markets of the NAFTA member countries (Canada, Mexico, and the United States) reflect movements in fundamentals or speculative bubbles. To this end, we estimate a state-space model to decompose the stock market indexes of the three NAFTA member countries into fundamentals and speculative bubbles. We analyze the linkages of the three stock markets by means of cointegration techniques. Evidence of cointegration linkages between fundamentals is stronger than evidence of cointegration linkages between speculative bubbles.     

The Role of Information Disclosure and Uncertainty in the 1994/95 Mexican Peso Crisis: Empirical Evidence

This paper analyzes the role that the distribution of information played during the Mexican peso crisis 1994/95. In accordance with theoretical models, we find that, first, an improvement in the mean of posterior beliefs about economic fundamentals generally reduced speculative pressures. Secondly, the standard deviation of beliefs as a measure of information disparity did not significantly influence traders’ behavior. Information disparity did have a significant impact, however, when combined with the mean of beliefs. The combined effect, moreover, allows a tentative distinction between private or public information having dominated posterior beliefs. In this respect, thirdly, our analysis points to public information having driven speculative pressures.     

A regime-switching approach to the study of speculative attacks: A focus on EMS crises

This paper implements a regime-switching framework to study speculative attacks against EMS currencies during 1979–1993. To identify speculative episodes, we model exchange rates, reserves, and interest rates as time series subject to discrete regime shifts between two possible states: “tranquil” and “speculative”. We allow the probabilities of switching between states to be a function of fundamentals and expectations. The regime-switching framework improves the ability to identify speculative attacks vis-à-vis the indices of speculative pressure used in the literature. The results also indicate that fundamentals (particularly budget deficits) and expectations drive the probability of switching to a speculative state. First Version Received: October 2000/Final Version Received: June 2001     

Seoul housing prices and the role of speculation

Between June 1998 and March 2006, the price index of apartment houses in Seoul, Korea, more than doubled, while fundamentals such as GDP, wage, and population increased by less than 35%. This study examines the role of a rational speculative bubble in this price surge. We find that unobservable information explains part of the price volatility; and that a rational bubble proxy is a significant driver of prices. However, neither latent information nor rational bubble is enough to explain the recent housing price appreciation, even in conjunction with observable fundamentals.     

Monetary policy before and after the euro: evidence from Greece

We model Greek monetary policy in the 1990s and use our findings to address two interrelated questions. First, how was monetary policy conducted in the 1990s so that the hitherto highest-inflation EU country managed to join the euro by 2001? Second, how compatible is the ECB monetary policy with Greek economic conditions? We find that Greek monetary policy in the 1990s was: (i) primarily determined by German/ECB interest rates, though still influenced by domestic fundamentals; (ii) involving non-linear output gap effects; (iii) subject to a deficit of credibility culminating in the 1998 devaluation. On the question of compatibility our findings depend on the value assumed for the equilibrium post-euro real interest rate and overall indicate both a reduction in the pre-euro risk premium and some degree of monetary policy incompatibility. Our analysis has policy implications for the new EU members and motivates further research on fast-growing EMU economies.     

Measuring the degree of market power in the Greek manufacturing industry

This paper investigates the competitive conditions in the Greek manufacturing industry, estimates the net and the total welfare losses due to the possible existence of market power and investigates factors affecting the market power at sectoral level and over time. The bootstrap method is applied to assign measures of accuracy to the statistical estimates. The empirical results imply the presence of imperfect competition in the Greek manufacturing industry and the existence of welfare losses. Furthermore, the findings indicate that labor intensity, the sector size and the openness influence the market power at the sectoral level and labor intensity, while the number of firms and the openness affect the market power over time.     

Capital Openness and Financial Crises: A Financial Contagion Model with Multiple Equilibria

Abstract

This paper explores the effects of capital openness on financial crises and contagion. In the model, we analyze four channels of contagion involved in the process of financial crisis: monsoon effects, spillovers, self‐fulfilling expectations and new information. We empirically test the data from China, an economy with capital account controls, and find that the fundamentals of China (PRC) are now in a vulnerable area which yields multiple equilibria. Consequently, the Chinese economy is easily affected via the channels discussed in this paper. Finally we suggest that the capital account of China should be opened gradually.     

Business cycles and economic crisis in Greece (1960–2011): A long run equilibrium analysis in the Eurozone

Empirical studies find that fluctuations in output and other macroeconomic aggregates are positively related across countries. Economic theory focuses on two main explanations: common shocks and common transmission mechanisms. In this paper, we conduct an empirical analysis of the international influences, specifically from the U.S. and E.U. on the Greek business-cycle. First, we provide an in-depth analysis of the Greek economy, summarizing crucial aspects and trends by means of relevant econometric techniques such as business cycles extraction and periodization based on filtering, spectral analysis and causality tests. Next, we assess the long-run equilibriums of the Greek economy with the rest of the E.U. countries and the U.S. economy by means of a Vector Error Correction model. Our results imply a significant shift in the long-run equilibriums of the Greek economy towards increasing convergence rates with the U.S. economy after the implementation of the common monetary policy and increasing convergence rates towards the peripheral countries of the E.M.U. Also, the Greek GDP fluctuations are found to be caused, to a certain extent, by the EMU and US fluctuations, implying a transmission mechanism of business cycles from the EMU and the US to the Greek economy.     

Greek Monetary Economics in Retrospect: The Adventures of the Drachma

This paper enumerates the adventures of the drachma step by step, dividing its story into seven parts. Specifically, its main purpose is to present some historical perspective on the behaviour of the monetary and fiscal policies pursued in Greece during the period from the early 1830s until the introduction of the euro. For Greece, the lessons of historical experience are very important. Since the formation of the modern Greek state, government officials have striven – sometimes making hard efforts – to keep abreast of international monetary developments. This was because they understood that the participation of a peripheral, poor and inflation‐prone country with a weak currency and an underdeveloped money market, like Greece of the time, in a monetary club of powerful economies could improve her international credit standing and imply important benefits in terms of exchange rate and monetary stability, and long‐term foreign borrowing .     

The hard shadow of the Greek economy: new estimates of the size of the underground economy and its fiscal impact

This article presents new estimates of the Greek underground economy and explores the link between the underground economy and aggregate debt. We show that the Greek underground economy has been underestimated heavily and has been on a rising trend again since Greece adopted the Euro. We also present evidence that the size of the underground economy is positively related to the debt-to-GDP ratio, implying that fighting the underground economy is also conducive to financial and macroeconomic stability. Our results suggest that for our sample of 11 EMU member countries, the loss of the inflation tax as an economic policy instrument had drastic consequences. While the underground economy did not have a statistically significant impact on aggregate debt before the introduction of the Euro, it has pushed up the debt-to-GDP ratio in our sample since.     

Population and house prices in the United Kingdom

Real house prices rise in the United Kingdom amid growing concern of an impending correction. The rate of household formation has increased with strong population growth, due to elevated rates of natural increase and net migration, and lack of growth in average household size, due to a rise in single‐person households with population ageing. This paper presents an overlapping generations model of housing, endogenous labour, savings and growth to analyse the effect of an increase in the household formation rate and speculative demand under rational expectations on house prices in a general equilibrium. We find that real house prices rise over time if the rate of household formation outstrips the rate of housing supply, but do not follow a speculative bubble path in the long run. The results explain why the upward trend in real house prices reflects market fundamentals and has continued despite population ageing as the number of working and retired households grows relative to the number of older people seeking to sell.     

Political booms and currency crises

This paper shows evidence that political booms, defined as the rise in governments’ popularity, are associated with a higher likelihood of currency crises. The reasoning behind this finding is that prudent economic policies to address underlying weaknesses in the economy may be political costly for incumbent governments in the short-term. Hence, popularity-concerned governments may not have enough incentives to take such corrective actions in a timely manner. This approach, in turn, can deteriorate economic fundamentals and increase related risks in the economy which can eventually lead to crises. This paper sheds light on this phenomenon in the case of currency crises, suggesting that currency crises can be viewed as “political booms gone bust” events. Moreover, it finds that higher international reserves, higher exports, and a higher degree of financial openness alleviate the effect of political booms on currency crises.     

Speculative securities

Summary. A speculative security is an asset whose payoff depends in part on a random shock uncorrelated with economic fundamentals (a sunspot) about which some traders have superior information. In this paper we show that agents may find it desirable to trade such a security in spite of the fact that it is a poorer hedge against their endowment risks at the time of trade, and has an associated adverse selection cost. In the specific institutional setting of innovation of futures contracts, we show that a futures exchange may not have an incentive to introduce a speculative security even when all traders favor it. Received: July 19, 1998; revised version: August 31, 1998     

Crisis and self-fulfilling expectations: The Turkish experience in 1994 and 2000–2001

In this paper we analyze the role of fundamentals and self-fulfilling expectations in the crisis episodes of Turkey in 1994 and 2001. The question is how much of the occurrence of a crisis can be attributed to market expectations and how much to fundamentals. The model is estimated using a Markov switching framework in which the devaluation expectations affect crisis probability via three different specifications. Such a framework which allows for sunspots performs better than a purely fundamental-based model. The study shows that besides the fundamentals in the economy, shifts in agents' devaluation expectations have played a crucial role and that a Markov switching model with constant transition probabilities provides better estimates for the Turkish currency crises.     

Trade Openness,Structural Change and Total Factor Productivity

The impact of trade openness on growth of total factor productivity (TFP) is investigated. Given the differences in tradability of goods across sectors as well as the ongoing structural change, we examine whether trade openness has had a differential impact on TFP growth of the three main sectors of an economy. While the positive impact of openness on TFP growth for the aggregate economy is confirmed, openness has had no appreciable impact on the growth of TFP in the agricultural and industrial sectors. We find that the positive effect of openness on TFP growth for the economy as a whole was mostly due to the positive relationship between the two variables for the services sector. Further, we conclude that the lack of a general consensus in past studies could be due to their neglect of structural change and temporal factors when analyzing the trade-TFP nexus.     

Executive Compensation and Short-Termist Behaviour in Speculative Markets

We present a multiperiod agency model of stock-based executive compensation in a speculative stock market, where investors have heterogeneous beliefs and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long-run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the "rent extraction view" of executive compensation.     

Financial development and economic growth in Greece: an empirical investigation with Granger causality analysis

This paper empirically examines the causal relationship between the degree of openness of the economy, financial development and economic growth by using a multivariate autoregressive VAR model in Greece for the examined period 1960:I-2000:IV. The results of cointegration analysis suggest that there is one cointegrated vector among GDP, financial development and the degree of openness of the economy. Granger causality tests based on error correction models show that there is a causal relationship between financial development and economic growth, but also between the degree of openness of the economy and economic growth.     

Bubbles and rationality in bitcoin

Periodically collapsing rational bubbles model speculative demand in asset markets. The price and quantity of bitcoin are integrated of different orders, which is evidence of a bubble. Cointegration tests that allow for the potential presence of such bubbles with alternative proxies for fundamentals cannot reject a bubble in bitcoin.