An extended NATREX model for China

This paper extends, for the first time, Stein’s (1995a) NATREX model to China and other similar emerging market economies. We incorporate fundamentals that have not been studied by the existing literature on the NATREX model to capture the unique characteristics of the Chinese economy. Based on dynamic stability analysis, we derive the medium-run and long-run real equilibrium exchange rates and relative prices of non-tradables, and provide a detailed analysis of the effects of fundamentals. The fundamentals that affect the long-run equilibrium real exchange rate and the relative price of non-tradables include terms of trade, total and net factor productivity, rural transformation, dependency ratio, financial liberalization, relative unit labour cost, relative rate of return to capital, government investment, tax rate and the foreign real interest rate

Integration in the European Retail Banking Sector : Evidence from Deposit and Lending Rates

This paper investigates the degree of integration in the retail-banking sector for 15 European Union member states between the period 1991 to March 2008. In view of consolidating and creating a single market in their financial services sector, the EU has launched and implemented major initiatives over the past years. The wholesale banking sector has been studied extensively but the retail market to a much lesser extent. The difficulty in analysing the integration process in the banking market is linked to the heterogeneity that exists across the European countries with regards to factors such as risk attitudes, cultural differences, and the home-bias criteria. As a result, it is argued that any convergence process in the banking sector, if present, should rather be perceived as a long-run relationship. Consequently, cointegration analysis, a technique used to capture such long-term relationships between sets of variables is used to analyse the integration process in the EU retail-banking sector. The starting point in the empirical analysis involves conducting multiple structural break analysis. Given that during the period under investigation, there have been significant milestones in the history of the European single market, the deposit and lending rates corresponding to this period are likely to exhibit structural change. Moreover, the timing and pattern of structural break occurrence should also act as an indicator of retail banking integration. The next steps in the empirical analysis look at stationarity tests for both time series data and panel data on data series that are also individually demeaned so as to account for structural breaks. Finally, bivariate time-series cointegration analysis on each of the EU countries and a weighted European average rate is performed. The cointegration analysis is performed on both level and demeaned data

Integration in European Retail Banking : Evidence from savings and lending rates to the household sector

The aim of this paper is to examine the integration process within the European Union retail banking sector during the period 1991-2008 by analysing deposit and lending rates to households. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country’s transition path relative to the panel average. We find evidence supporting integration in the deposit and short-term mortgage markets but not in the consumer credit market and longer term mortgages. The club clustering tests suggest that the convergence process is not homogeneous among countries. In addition, it is observed that the speed of convergence is inversely related to the maturity duration for all deposit and lending rates.Submitted Versio

The global financial crisis and integration in European retail banking

This document is the Accepted Manuscript version of the following article: Aarti Rughoo, and Nicolas Sarantis, 'The global financial crisis and integration in European retail banking', Journal of Banking and Finance, Vol. 40: 28-41, March 2014, and is made available under the terms of the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/ The definitive, final Version of Record is available online via: https://doi.org/10.1016/j.jbankfin.2013.11.017The aim of this paper is twofold. Firstly, to investigate the integration process within the European Union retail banking sector by analysing deposit and lending rates to the household sector during the period 2003-2011. Secondly, to assess the impact of the 2008 global financial crisis on the banking integration process, an area that is yet unexplored. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country's transition path relative to the panel average. The empirical results point to the presence of convergence in all deposit and lending rates to the household sector up to 2007. In sharp contrast, the null of convergence is rejected in all deposit and credit markets after the onset of the 2008 financial crisis. These results show that the global crisis has had a detrimental effect on the banking integration process. We find some convergence in a few sub-clusters of countries but the rate of convergence is typically slow and several countries are identified as diverging altogether. In addition, we find that the credit market, in general, is far more heterogeneous than the savings market.Peer reviewedFinal Accepted Versio

Structural Breaks and Convergence in the European Retail Banking Sector

The aim of this paper is to investigate the convergence process in the European retail banking sector by analysing monthly deposit and lending data sets for the household and non-financial corporations sectors, the two sectors of retail banking, for the period 1991 to 2008. One of the main contributions of this paper is the application of the stochastic multiple structural break model developed by Bai and Perron (1998). This methodology is chosen in order to verify whether the interest rate data have been subject to structural change and whether the timings in the break dates coincide with significant events in the history of European banking. The second contribution of this paper is to test for convergence in the interest rate data by employing the Pesaran (2007) panel unit root tests while allowing for structural breaks. The findings show that the retail interest rate data have between two to four breaks which tend to be clustered around specific events such as new EU legislation. In addition, it is revealed that the presence of structural breaks materially affect the convergence results

Does the Purchasing Power Parity Hold in Emerging Markets? Evidence from Black Market Exchange Rates

We examine the Purchasing Power Parity (PPP) hypothesis using a unique panel of monthly data on black market exchange rates for twenty emerging market economies over the period 19973M1-1993M12. We apply a large number of recent heterogeneous panel unit root and cointegration tests. Panel unit root tests do not favour mean reversion in the real black market exchange rate. The evidence for non-rejection of the unit root hypothesis remains robust even after allowing for structural breaks. Panel cointegration tests support evidence of cointegration between the nominal exchange rate and relative prices. These results contrast with those obtained from unit root tests. Since we believe that the former may be biased by the imposition of the joint symmetry and proportionality restriction, we test for such a restriction using likelihood ratio tests and find that it is strongly rejected.black market exchange rates, purchasing power parity, panel unit root and cointegration tests

Central bank independence : an updated set of indices and the implications for inflation

The Grilli-Masciandaro-Tabellini and Cukierman indices of central bank independence, as well as the turnover of central bank governors, are updated for the late 1990s and early 2000s using the most recently published central banking laws for 90 industrial and developing countries. Included in our indices are most of the Eastern European and South-East Asian countries and a subset of African states. We examine how these CBI indices correlate among themselves and how they compare with previous estimates of CBI indices based on legislation available in the 1980s. We also provide an assessment of how well the new CBI indices correlate with inflation for the periods following any new legislation

A FEER Model for the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate

This paper provides an application of the FEER model to the real exchange rate of the Chinese Yuan against the US Dollar. An important contribution is that we incorporate into the sustainable current account fundamentals that reflect the unique features of the Chinese economy but have not been employed by previous studies. Another contribution is the construction of a unique data set of consistent time series for economic fundamentals and trade-related variables, which allow us to carry out an econometric investigation of trend and sustainable current accounts and compute the FEER for both pre- and post-reform periods. The empirical results show that both the sustainable and trend current account surpluses have been steadily rising since the early 1990s. Chinese exports appear to be more price elastic, while imports are more income elastic. The misalignment rates suggest that the RMB was overvalued against the USD during the pre-reform period and has been undervalued for most of the postreform period, particularly since 2003. However the misalignment rates are not as large as suggested by previous studies

The Equilibrium Real Effective Exchange Rate of China: A NATREX Approach

In this paper we examine the determinants of China’s equilibrium real effective exchange rate and investigate the misalignments in the Renminbi. This paper makes a number of theoretical and empirical contributions. At the theoretical level, we extend the NATREX model to incorporate a large number of economic fundamentals that capture the unique features of the Chinese economy. At the empirical level, this is the first application of the extended NATREX model to China. Another contribution is that we estimate the extended NATREX model for both the pre- and post- reform periods. We have constructed a unique data set of consistent time series for the effective exchange rate and a large number of economic fundamentals for China since the 1950s. A further contribution is the use of total and net factor productivity obtained from an estimated production function. We find strong evidence of persistent undervaluation of the RMB during 1994-2005, accelerating in particularly after 2000. However the misalignment rates are much lower than those reported by previous studies. We also find weak evidence of overvaluation for most of the pre-reform period. For the rest of the sample period, there was no persistent misalignment