Does democracy cure a resource curse?

In this paper we utilise a large and reasonably detailed dataset to show that a greater level of democracy in a country's political institutions can alleviate the widely known resource curse. Raw material abundance affects per capita growth negatively, an effect that seems to work through several different channels. Resource-abundant countries have a lower degree of democracy and political rights, and also a lower level of educational attainment. These factors inhibit growth. On the other hand, countries with large extractive industries exhibit high levels of investment. The effects of resource abundance differ for different raw material types, and the largest negative effect on growth appears to come from non-fuel extractive raw materials.economic growth; resource curse; cross-country regression; development; governance; institutions

Currency Boards in the Baltic Countries: What Have We Learned?

Straightforward exchange rate arrangements known as currency boards have gained popularity during the past dec-ade. Among transition economies, Estonia first introduced a currency board in 1992, followed by Lithuania in 1994 and Bulgaria in 1997. Currency boards have been useful in achieving macroeconomic stabilization, and they may have helped the Baltics become the first countries of the former Soviet Union (FSU) to achieve economic growth after the slump in production of the early 1990s. Moreover, Baltic inflation performance has been substantially better than in other FSU countries. Both in Estonia and Lithuania, the present exchange rate system has been ac-companied by strong real appreciation of the currency. Both in Estonia and Lithuania the present exchange rate system has been accompanied by strong real appreciation of the currency, although it is widely accepted that the currencies were very much undervalued at the beginning of their pegs. However, if rapid real appreciation is ac-companied with increases in the labor productivity, the present pegs can be maintained. Banking crises in Estonia and Lithuania have not been particularly severe, so apparently rigid currency pegs have not been accompanied by excessive financial sector instability. The tight fiscal policies pursued in both countries, especially Estonia, have been instrumental to the success of these currency board arrangements.exchange rate; currency board; Baltic countries

Some empirical tests on the integration of economic activity between the Euro area and the accession countries

This note looks at the correlation of short-term business cycles in the euro area and the EU accession countries. The issue is assessed with the help of vector autoregressive models. There are clear differences in the degree of correlation between accession countries. For Hungary and Slovenia, euro area shocks can explain a large share of variation in industrial production, while for some countries this influence is much smaller. For the latter countries, the results imply that joining the monetary union could entail reasonably large costs, unless their business cycles converge closer to the euro area cycle. Generally, for smaller countries the relative influence of the euro area business cycle is larger. Also, it is found that the most advanced accession countries are at least as integrated with the euro area business cycle as some small present member countries of the monetary union.optimal currency area; monetary union; EU enlargement

The Impact of the Global Financial Crisis on Business Cycles in Asian Emerging Economies

We analyze the transmission of global financial crisis to business cycles in China and India. The pattern of business cycles in emerging Asian economies generally displays a low degree of synchronization with the OECD countries, which is consistent with the decoupling hypothesis. By contrast, however, the current financial crisis has had a significant effect on economic developments in emerging Asian economies. Applying dynamic correlations, we find wide differences for different frequencies of cyclical development. More specifically, at business cycle frequencies, dynamic correlations are typically low or negative, but they are also influenced most by the global financial crisis. Finally, we find a significant link between trade ties and dynamic correlations of GDP growth rates in emerging Asian countries and OECD countries.financial crisis, business cycles, decoupling, trade, dynamic correlation

Observations on disinflation in transition economies

The transition economies were remarkably successful in curbing the inflation that took place after the initial transition and shocks and, more recently, most of the countries have brought inflation down to the levels found in major developed countries. In this paper we review the experiences and show how fiscal discipline, monetary policy and exchange rate policy contributed to the outcome. In addition, we note that the influence of EU accession on institutions and policy may have played an important role. The paper also surveys the literature on the quality of the inflation data, the extent to which necessary relative price adjustments have occurred and the size of the Balassa-Samuelson effect. Case studies of disinflation in four countries are presented: Poland, Romania, Estonia and Russia.

Similarity of supply and demand shocks between the Euro area and the CEECs

We assess the correlation of supply and demand shocks between the countries of the euro area and the accession countries in the 1990s. Shocks are recovered from estimated structural VAR models of output growth and inflation. We find that some accession countries have a quite high correlation of the underlying shocks with the euro area. However, even for many advanced accession countries, the shocks remain significantly more idiosyncratic. Furthermore, many EU countries seem to have a much higher correlation with the core euro area countries than in the previous decades. Continuing integration within the EU seems to have aligned the business cycles of these countries as well.optimum currency area; EMU; EU enlargement; structural VAR

A meta-analysis of business cycle correlation between the euro area and CEECs: What do we know – and who cares?

We review the literature on business-cycle correlation between the euro area and Central and Eastern European countries (CEECs), a topic that has gained attention in recent years as new EU entrants prepare for participation in the monetary union. Our meta-analysis suggests several CEECs already have comparably high correlation with the euro area business cycle. We also find that estimation methodologies can have a significant effect on correlation coefficients. While central bankers are more conservative in their estimates, we find no evidence of a geographical bias in the studies.monetary union; optimum currency area; business cycles; meta-analysis

The impact of the global financial crisis on business cycles in Asian emerging economies

We analyze the transmission of global financial crisis to business cycles in China and India. The pattern of business cycles in emerging Asian economies generally displays a low degree of synchronization with the OECD countries, which is consistent with the decoupling hypothesis. By contrast, however, the current financial crisis has had a significant effect on economic developments in emerging Asian economies. Applying dynamic correlations, we find wide differences for different frequencies of cyclical development. More specifically, at business cycle frequencies, dynamic correlations are typically low or negative, but they are also influenced most by the global financial crisis. Finally, we find a significant link between trade ties and dynamic correlations of GDP growth rates in emerging Asian countries and OECD countries.financial crisis; business cycles; decoupling; trade; dynamic correlation

A note on exchange rate pass-through in CIS countries

We assess the extent and speed of exchange rate pass-through in the countries of the Commonwealth of Independent States (CIS). We do this in the framework of vector autoregressive regressions, utilising impulse functions and variance decompositions with monthly data that starts in 1999 in order to avoid periods of very high inflation and the Russian crisis. We find that exchange rate movements have a clear impact on price developments in the CIS countries. The speed of the pass-through is also fairly high: in most cases the full effect is transmitted into domestic prices in less than 12 months. Unlike in many other emerging market economies, an additional effect from US prices on to domestic prices is not significant. The extent of the exchange rate pass-through is usually much higher than in our benchmark group of emerging market countries. Variance decomposition shows that the relative share of exchange rates in explaining changes in domestic prices is higher in the CIS countries than in the benchmark group. Our results indicate that policy-makers in the CIS countries need to pay more attention to exchange rate movements than in many other emerging market countries.exchange rate pass-through; inflation; exchange rate regime; transition countries

Like China, the Chinese banking sector is in a class of its own

This paper provides an overview of the Chinese banking sector, which has expanded tremendously over the past two decades. We first describe aggregate developments of the sector and compare them to the situation in other countries. Also, various financial institutions that operate in China are analyzed. Our results confirm that the Chinese banking sector is truly in a class of its own, especially given the level of China’s economic development. Despite significant reforms, the state and various public organizations still own controlling shares in the largest commercial banks. The state is also present on the borrowers’ side; it is estimated that about half of state-owned commercial bank lending still goes to state-controlled companies. In this way, the banking system can serve as an important policy tool. Another distinctive feature of the Chinese banking sector is the variety of its banking institutions. New types of banking institutions, especially those serving rural areas, are emerging all the time. While equity and debt markets are still tiny relative to the banking sector and their importance as sources of financing of investment remain minor, they have evolved rapidly in recent years.China; banking sector; state banks