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

ZAUSTAVLJANJE PRILJEVA KAPITALA TIJEKOM FINANCIJSKE KRIZE: JE LI VAŽNA NJIHOVA PRETKRIZNA STRUKTURA?

Record amounts of global capital flows that reached a peak in 2007 came to a sudden stop in the second half of 2008 with the spread of the financial crisis from the U.S. to the rest of the world. Theoretical assumptions considering different characteristics of various types of capital flows emphasize the higher probability for sudden stop or capital reversal episodes during financial crises in countries whose financial accounts rely more on foreign loans, rather than foreign direct investment (FDI). The aim of this paper is to test these assumptions on a sample of 75 advanced and developing countries during the recent financial crisis. The descriptive analysis revealed different reactions to the crisis and post-crisis recovery amongst various groups of emerging and developing economies. Namely, countries of Central and Eastern Europe (CEEC) and Commonwealth of Independent States (CIS), which had relied predominantly on foreign loans financing prior to the crisis, marked greater reduction in inflows comparing to more FDI reliant Latin American and Developing Asian countries. The econometric model using cross-sectional dataset confirmed that countries that in the pre-crisis period relied more on foreign loan financing, recorded more intensive withdrawal of foreign capital during the crisis. The main contribution of the paper is of an empirical nature, as it provides an insight into the determinants of capital reversals during the recent financial crisis on a sample of relatively large number of countries, and further acknowledges the importance and possible repercussions of the composition of a country’s financial account.Rekordni iznosi globalnih tokova kapitala koji su dosegli vrhunac u 2007., doživjeli su nagli zastoj u drugoj polovici 2008. širenjem financijske krize iz SAD-a na ostatak svijeta. Teorijske pretpostavke o različitim značajkama pojedinih vrsta kapitalnih priljeva ističu veću vjerojatnost za nagli zastoj ili bijeg kapitala tijekom financijskih kriza u zemljama čiji se financijski računi platne bilance više oslanjaju na inozemne kredite, nego na izravna strana ulaganja (FDI). Cilj ovog rada jest ispitati vrijede li navedene pretpostavke na uzorku od 75 razvijenih i zemalja u razvoju tijekom razdoblja recentne financijske krize. Deskriptivna analiza je otkrila različite reakcije na krizu, ali i različitu dinamiku postkriznog oporavka između pojedinih skupina zemalja u razvoju. Naime, zemlje Srednje i Istočne Europe te Zajednice nezavisnih država, koje su se u pretkriznom razdoblju pretežno financirale inozemnim kreditima, zabilježile su znatno veće smanjenje priljeva u odnosu na FDI-u sklonije zemlje Latinske Amerike i Azije. Rezultati ekonometrijskog modela potvrdili su da su zemlje koje su se u pretkriznom razdoblju oslanjale dominantno na inozemne kredite, zabilježile intenzivnije epizode povlačenja inozemnog kapitala tijekom krize. Glavni doprinos ovog rada je empirijske naravi, s obzirom da pruža uvid u odrednice bijega kapitala zabilježenog tijekom nedavne financijske krize na uzorku relativno velikog broja zemalja te daje daljnju potvrdu o važnosti i mogućim posljedicama strukture financijskog računa platne bilance

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

Rezistentnost priljeva kapitala u uvjetima globalne financijske krize: slučaj europskih tranzicijskih zemalja

Ekonomska teorija smatra izravna strana ulaganja (FDI) stabilnijim od inozemnih kredita, te manje sklonim povlačenju i napuštanju zemlje u razdobljima financijskih kriza, a te pretpostavke imale su empirijsku potvrdu u ranijim financijskim krizama. Cilj ovoga rada je deskriptivno i ekonometrijski testirati jesu li iste pretpostavke vrijedile i za europske tranzicijske zemlje tijekom globalne financijske krize 2008. – 2009., o čemu još uvijek ne postoji dovoljan broj empirijskih radova. Rezultati modela višestruke linearne regresije upućuju na zaključak da je financijska kriza imala signifikantno negativan učinak na kretanje ukupnih kapitalnih priljeva u svim zemljama, osim Slovačke. Priljevi FDI-ja se nisu pokazali rezistentnima na krizu, te su se smanjili na razinu jedne petine priljeva iz pretkriznog razdoblja, a ekonometrijska analiza je potvrdila negativan signifikantan utjecaj krize na FDI u svim zemljama, izuzev Estonije i Poljske. Priljevi FDI-ja su se ipak pokazali otpornijima na financijsku krizu usporedimo li ih s priljevima inozemnih kredita, te je njihovo smanjenje bilo slabijega intenziteta, što je potvrđeno i deskriptivnom i ekonometrijskom analizom

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