Financial supply cycles in “new Europe” - introducing a composite index for financial supply

This paper introduces a new composite index - the financial supply index (FSI), which measures the level of supply of foreign capital to 11 EU new member states (NMS). We aim to fill the gap in the literature, which has so far focused on creating indices that measure the financial conditions only, while the economic factors, also important determinants of capital flows, have been overlooked. FSI includes both the financial and economic determinants of capital flows and is estimated using Kalman filtering, principal components and variance-equal weights approach. Three financial supply cycles in NMS could be extracted based on the analysis of FSI dynamics. The results indicated that the main drivers of financial supply to NMS are externally determined, with economic sentiment and business climate in the Eurozone carrying the highest weight. In addition, we create a new indicator - the Refinancing Risk Ratio (RRR), which relates the supply and demand for foreign capital, to quantify the external refinancing conditions and risk faced by the government. We are able to distinguish between two main episodes of high refinancing risk faced recently by the EU NMS - one during the global financial crisis, and the other during the European sovereign debt crisis, but the episodes significantly differ in nature

Testing \u27the trilemma\u27 in post-transitional Europe: a new empirical measure of capital mobility

This paper develops a new empirical measure of capital mobility. It tests the hypothesis that the degree of capital mobility can be estimated by measuring the reaction intensity of capital flows to shocks in interest rates, on a sample of eight European post-transitional economies. This hypothesis can be derived from the Mundell-Fleming open economy model, implications of which are essentially based on the assumption of a close link between the degree of capital mobility in a country and the reaction of its capital flows to changes in domestic and external interest rates. Precisely because of this interrelationship, policy holders, in theory, face the policy trilemma or the \u27impossible trinity\u27, i.e. the inability to achieve three following objectives simultaneously – a stable exchange rate, financial openness, and an independent monetary policy. Using impulse response and historical decomposition analysis in a VAR framework, the results show a significant increase in the explanatory power of interest rates for the movement of capital flows shortly before and after the accession of post-transitional economies to the European Union. On the other hand, the recent financial crisis made capital flows less sensitive to interest rates due to increased risk aversion on international capital markets. Results suggest that the degree of capital mobility, i.e. the level of financial integration with EU-15, is highest in Bulgaria, Latvia and Lithuania, and least pronounced in Poland and Croatia. Results are verified by a number of robustness checks, with three separate alternative measures of capital mobility confirming the results obtained from the econometric model

Financial supply cycles in “new Europe” - introducing a composite index for financial supply

This paper introduces a new composite index - the financial supply index (FSI), which measures the level of supply of foreign capital to 11 EU new member states (NMS). We aim to fill the gap in the literature, which has so far focused on creating indices that measure the financial conditions only, while the economic factors, also important determinants of capital flows, have been overlooked. FSI includes both the financial and economic determinants of capital flows and is estimated using Kalman filtering, principal components and variance-equal weights approach. Three financial supply cycles in NMS could be extracted based on the analysis of FSI dynamics. The results indicated that the main drivers of financial supply to NMS are externally determined, with economic sentiment and business climate in the Eurozone carrying the highest weight. In addition, we create a new indicator - the Refinancing Risk Ratio (RRR), which relates the supply and demand for foreign capital, to quantify the external refinancing conditions and risk faced by the government. We are able to distinguish between two main episodes of high refinancing risk faced recently by the EU NMS - one during the global financial crisis, and the other during the European sovereign debt crisis, but the episodes significantly differ in nature

Book review: The Economics of European Integration

Nem

Early bird catches the worm: finding the most effective early warning indicators of recessions

The paper examines whether certain macrofinancial indicators can be used for early detection of recessions. Analysing a sample of small open economies from Central and Eastern European Union, we first identify the most important indicators used for early detection of recessions, and then test the validity of the selection by using the signal method and multivariate probit regressions. Our results imply that the most effective predictors of upcoming recessions are the slope of the yield curve, current account balance to GDP ratio, real estate price index, self-financing ratio of commercial banks, nominal effective exchange rate, global exports and LIBOR rate. Using the Mann-Whitney U Test, we also find that foreign indicators emit earlier signals of incoming recessions in analysed countries than domestic ones. This type of research is important because of the various stakeholders that base their decisions on the signals provided by these indicators. Primarily, these are various government agencies that participate in monetary and fiscal policy making. Early warning of an impending recession allows economic policy makers to take corrective action to avoid a recession or to significantly mitigate its effects, while unreliable indicators may lead to adoption of unnecessary measures with adverse effects on the economy

Penny wise and pound foolish: capital gains tax and trading volume on the Zagreb Stock Exchange

This paper analyses the effects of a recently introduced capital gains tax on the trading volume on the Zagreb Stock Exchange. Using three different methodological approaches – event study methodology, regression discontinuity design and panel regressions – we offer evidence that the introduction of the capital gains tax in January 2016 created abnormally high trading volume patterns shortly before the tax came into force and abnormally low volume patterns after the fact, further decreasing the liquidity of an already poorly liquid market. The negative effects are significant in both the short and the longer term, as our difference-in-differences estimations suggest that the average trading volume in the three post-tax years decreased by 23% vis-à-vis the pre-tax period. Given that the revenues collected from this tax are almost negligible, but create considerable negative externalities, our main policy recommendation for countries with underdeveloped and not very liquid stock markets is to use less restrictive tax policies to encourage investment and attract as many new investors as possible

How (Fictional) Politicians Persuade and Manipulate Their Viewers? The Case of House of Cards

In times of increasing individualism when many traditional socialization institutions lose their primary role and influence, television series characters have become new role models that people can identify with. Modern television production is inclined to portray protagonists as antiheroes because viewers are more engaged and intrigued by them compared to the traditional protagonists. Series often break the so-called “fourth wall” in a way of transcending boundaries between virtual and real life, talking directly to the viewers, thus creating parasocial interaction. According to the transportation theory of persuasion, the greater the emotional bond with the characters, the higher the possibility for the viewers to “transport” within the narrative. This phenomenon can be particularly noticed in the political drama House of Cards, where the Machiavellian politician Frank Underwood persuades both characters in the story and the viewers in order to achieve some of his personal goals. The aim of this paper is to highlight the methods of persuasion and manipulation used by the protagonist in order to recognize how he wants to persuade us and recognize what his underlying goals are

Monetary Policy Effectiveness, Net Foreign Currency Exposure, and Financial Globalisation

In this paper we use an innovative methodological approach to investigate how the classic Mundell-Flemming trilemma monetary policy mix is affected by global financial integration ("dilemma" hypothesis), accumulation of international reserves ("quadrilemma" hypothesis) and foreign exchange rate exposure of developing, emerging and transition countries. In order to compare competing policy mix hypotheses within the single methodological framework we use two threshold variables simultaneously in a dynamic panel threshold model. Thresholds values are endogenously estimated using a grid search. Exchange rate stability index is used as a primary threshold variable and international reserves, financial openness and foreign currency exposure are rotated as secondary threshold variables. Results imply that there are significant differences between fixed and flexible exchange rate regimes even at the high levels of financial integration and that transmission of international business cycle might be a consequence of an exchange rate regime choice (due to foreign currency exposure) of developing and emerging countries and not a consequence of inability to implement counter-cyclical monetary policy

Managing the impact of globalization and technology on inequality

This article tests the relative importance of globalization and technological change in explaining income inequality at higher and lower development levels. Besides, the article analyses the effectiveness of a set of policy measures for fighting inequality. We use relative pre-tax income shares as a proxy for inequality. Several linear and non-linear threshold panel data models with GDP per capita as the threshold variable are estimated for 42 countries over the period from 1994 to 2016. We find that technology is the most important generator of inequality, while the effect of various globalization measures is weak and often insignificant. We find limited evidence that the effect of globalization differs with respect to the level of GDP per capita. Our results suggest that full employment policies in the low inflation environment are the most efficient solution for the inequality problem. Higher employment and low inflation rate decrease the inequality level. Other than that, we do not find other policy measures that satisfy the one-size-fits-all criteria for tackling inequality. Instead, a set of efficient policy measures against inequality, including expenditures on education, minimum wage policies, and lending rates, depend on the development level and idiosyncratic policies and institutions