Banks’ Risk Preferences and Their Impact on the Loan Supply Function: Empirical Investigation for the Case of the Republic of Macedonia

U ovom se radu empirijski istražuje postojanje kreditnog kanala i njegovih odrednica u Republici Makedoniji. Rezultati istraživanja ukazuju na njegovo postojanje. Najutjecajnija bankovna značajka je udio nenaplativih kredita u ukupnim kreditima koji bi mogao aproksimirati preferencije banaka prema riziku. To bi značilo da su preferencije banaka prema riziku među najutjecajnijim faktorima određivanja kreditnih aktivnosti banaka. Međutim, drugačija interpretacija udjela nenaplativih kredita sugerira da bi on mogao biti pokazatelj ex-post kvalitete kreditnog portfelja te stoga može ukazivati na porast bankovne premije na eksterno financiranje. Vezano uz ostale bankovne značajke, rezultati empirijskog istraživanja pokazuju da likvidnost banke ima suprotni predznak od onoga što teorija sugerira te da ne postoje čvrsti dokazi da kapital banke utječe na ponudu kredita jer su rezultati osjetljivi na različite metode ocjene i broj instrumenata. Što se tiče veličine aktive, rezultati ne ukazuju na statistički značajan utjecaj.This paper empirically investigates the existence of a bank lending channel and its determinants in the Republic of Macedonia. The results suggest that there is robust statistical evidence in favour of the existence of a bank lending channel. The most influential bank-specific characteristic is the non-performing loans (NPL) ratio which might be a proxy for banks’ risk preferences. This would imply that banks’ risk preferences are among the most influential factors in determining banks’ lending activities. However, an alternative interpretation of the NPL ratio suggests that it might serve as an indicator of the ex-post quality of the loan portfolio and, hence, may indicate an increase in banks’ external financing premium. Regarding the rest of the bank-specific characteristics, empirical results show that bank liquidity has the opposite sign from what the theory suggests, while there is no strong evidence that bank capital has impact on the loan supply function as the results are sensitive to different estimation methods and the number of instruments created. Regarding the asset size, the results do not imply any statistically significant impact

The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis

We analyse the effects of fiscal and monetary policies in Croatia and Macedonia estimated by a Bayesian vector autoregression (VAR). The main results of the study are as follows. Fiscal tightening leads to economic expansion in Macedonia and a decline in economic activity in Croatia. In both countries fiscal tightening leads to a decline in inflation and money market rates. Monetary tightening leads to output contraction and a decline in inflation in both countries. We find an opposite reaction of the fiscal authorities to a monetary shock, i.e., monetary contraction is accompanied by fiscal tightening in Croatia and by loose fiscal policy in Macedonia

The Interest Rate and Bank Lending Channels in a Small, Open and Euroised Economy with Fixed Exchange Rate – the case of Macedonia

ABSTRACT This thesis explores the possibility of conducting a more independent monetary policy through the adoption of an inflation targeting regime in a small, open and Euroised transition economy where banks are dependent on foreign financing. The major aim of this research programme is to investigate the effectiveness and determinants of the interest rate and bank lending channels in the case of Republic of Macedonia, since their effectiveness is seen as one of the preconditions for adoption of an inflation targeting regime. This thesis contributes to the existing literature for transition economies in two main ways. Firstly, it investigates the size and determinants of individual bank‟s lending rate adjustments to changes in the „cost of funds‟ rate. Secondly, it examines two loan functions according to the currency disaggregation of loans, and investigates what bank-specific characteristics are the major determinants. The findings with respect to the first research contribution indicate that the size of the short-run adjustment of lending rates to changes in the „cost of funds‟ rate is quite sluggish and heterogeneous among Macedonian banks. Moreover, bank-specific characteristics and macroeconomic variables play different roles in individual bank‟s lending rate setting decisions. These results are consistent with the presence of aggregation bias in previous research that uses sector-level data, due to the suppression of banks‟ heterogeneous behaviour. The results regarding the second research contribution imply that the bank lending channel in Macedonia works mainly through foreign currency loans and the foreign reference rate, whereas the responsiveness of domestic currency loans to the changes in the domestic reference rate is quite low. Moreover, different banks react differently to changes in the domestic and foreign reference rates due to their specific characteristics. These findings suggest that the impact of domestic monetary policy on the Macedonian economy through the interest rate and bank lending channels is quite limited. Therefore, the current monetary policy regime of a fixed exchange rate may be more effective in achieving the price stability aim than adoption of an inflation targeting regime in economies like Macedonia

Investigating the Cyclical Behavior of Fiscal Policy in the Republic of Macedonia during the Period of Transition

The main aim of this research is to investigate the cyclical behavior of fiscal policy with respect to output gap fluctuations in the Republic of Macedonia during the period 1991-2009. We use two different fiscal policy measures: 1) the cyclically unadjusted primary budget balance and 2) the cyclically adjusted primary budget balance as a proxy indicator of the fiscal policy stance. This analysis also aims to explore whether there was a substantial change in the fiscal policy behavior prior to 1996 due to the turbulent initial period of transition and the switch in monetary policy strategy. We additionally control for other factors that also seem to have had a significant impact over the fiscal policy behavior, such as the armed conflict in 2001 and the impact of public debt as a proxy indicator of budget financing constraints. The estimated results with respect to both measures, the cyclically unadjusted and cyclically adjusted budget balance, indicate differences in the fiscal policy behavior prior to and after 1996. More precisely, the results imply that the fiscal policy behavior prior to 1996 was procyclical, whereas afterwards the fiscal policy became countercyclical. These results are robust to different measures of the output gap and different frequency of the data sets.fiscal policy, cyclically adjusted balance, output gap, monetary policy change

GDP Data Revisions in Macedonia – Is There Any Systematic Pattern?

This paper investigates the existence of any systematic relationship between preliminary estimates and subsequent revisions of GDP growth rates in Macedonia. Accordingly, we use various statistical tools for testing the 'news' and 'noise' hypotheses and empirically assess if GDP data revisions are unbiased and efficient and vice versa. The results based on different empirical approaches in general provide mixed results about the predictability of GDP revisions, although the empirical evidence tends to incline that the long-term and final GDP revisions are efficient and contain new information that is in line with the 'news' hypothesis. We conclude that each subsequent revision is unpredictable

The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis

We analyse the effects of fiscal and monetary policies in two South Eastern European (SEE) economies with currency pegs (Croatia and Macedonia) estimated by the Bayesian Vector Autoregression. The main results of the study are as follows: Fiscal tightening leads to economic expansion in Macedonia and a decline in economic activity in Croatia. In both countries fiscal tightening leads to a decline in inflation and money market rates. Monetary tightening leads to output contraction and a decline in inflation in both countries. We find opposite reaction of fiscal authorities to a monetary shock: monetary contraction is accompanied by fiscal tightening in Croatia and by loose fiscal policy in Macedonia

Investigating the Cyclical Behavior of Fiscal Policy in the Republic of Macedonia during the Period of Transition

The main aim of this research is to investigate the cyclical behavior of fiscal policy with respect to output gap fluctuations in the Republic of Macedonia during the period 1991-2009. We use two different fiscal policy measures: 1) the cyclically unadjusted primary budget balance and 2) the cyclically adjusted primary budget balance as a proxy indicator of the fiscal policy stance. This analysis also aims to explore whether there was a substantial change in the fiscal policy behavior prior to 1996 due to the turbulent initial period of transition and the switch in monetary policy strategy. We additionally control for other factors that also seem to have had a significant impact over the fiscal policy behavior, such as the armed conflict in 2001 and the impact of public debt as a proxy indicator of budget financing constraints. The estimated results with respect to both measures, the cyclically unadjusted and cyclically adjusted budget balance, indicate differences in the fiscal policy behavior prior to and after 1996. More precisely, the results imply that the fiscal policy behavior prior to 1996 was procyclical, whereas afterwards the fiscal policy became countercyclical. These results are robust to different measures of the output gap and different frequency of the data sets

What Drives Bank Lending in Domestic and Foreign Currency Loans in a Small Open Transition Economy with Fixed Exchange Rate? The Case of Macedonia

This paper investigates two different bank loan supply functions and their determinants according to the currency of bank loans in the Republic of Macedonia. There is robust statistical evidence in favour of the existence of a bank lending channel through foreign currency loans and the foreign reference interest rate. This suggests that the impact of domestic monetary policy over the bank lending channel is limited. The most significant bank-specific characteristic for the foreign currency loan supply function is bank size, whereas for the domestic currency loans no bank-specific variable plays a significant role.