Financial Integration, Exchange Rate Regimes in CEECs, And Joining the EMU: Just Do It...

Candidate countries of central and eastern Europe (CEECs) are suppose to join the EU in 2004, June, which imply that they will face important challenges in the conduct of macroeconomic policy, in order to be able to enter the ERM-II system and eventually enter the EMU (European Monetary Union). Abandoning an independent monetary policy might entail significant costs for countries, which have succeeded in recovering and are in a process of catching-up. However those costs have probably been exaggerated, and their estimation biased by the traditional optimal currency area criteria. The main criticism against a too strong emphasis on the latter rests on two arguments. The first one is that assessing the trade-off for joining the EMU does not deliver the same conclusion ex ante and ex post. Meanwhile, the degree of financial integration will likely increase dramatically, which in turns will decrease the opportunity cost of loosing the monetary policy for absorbing country specific shocks. In a world of capital mobility, the room left for an independent monetary policy is very narrow, maybe close to zero in small, emerging countries, more vulnerable to speculative attacks than countries in the core. The second argument is more empirical. While the link between the exchange rate regime and the fundamentals is rather weak, the political agenda of joining the EU and subsequently the EMU seems to explain the choice of the exchange rate regime.http://deepblue.lib.umich.edu/bitstream/2027.42/40036/3/wp650.pd

The Political Business Cycles in the EU enlarged

The rationale behind the EU enlargement has been extensively debated3. Several authors emphasised the lack of convergence between old and new members, and the risk of jeopardizing economic growth by limiting the room for political adjustment, others considered that the process of enlargement was a way of anchoring the transition towards the market, of stabilising the economies, and of accelerating the speed of convergence and catching-up. The most popular analytical framework used for assessing the pros and cons of the enlargement of the EMU is the OCA (Optimal Currency Area) theory. Basically, the theory tells that in the absence of economic symmetry, two countries are less likely to benefit from a common currency, and that if they do, the task will be easier with flexible markets.More recent studies go further by demonstrating that the process of monetary unification is an endogenous process. Once the political decision of entering a common market and sharing the same currency has been taken, business cycles become more synchronized - thanks to the increase in intra-industry trade amongst others - internal openness increases, capital marketimperfection vanishes, contributing to ease the financing of backward regions.EU area, political business cycles

Investment, Efficiency, and Credit Rationing: Evidence from Hungarian Panel Data

Relying upon a rich and unique panel of Hungarian firms over 7 years, from 1992 up to 1998, this paper estimates simultaneously TFP, Total Factor Productivity, identified as efficiency, and the parameters of a model where investment depends upon internal funds, wages, and sales, as in Prasnikar J. and Svejnar J. (2000). It shows that while real investment is higher in foreign firms, the improvement in efficiency due to investment is significantly higher in Hungarian domestic firms. We test the possibility that this higher than average foreign investment may exacerbate other firms credit constraints by crowding them out of domestic capital markets. Of course one must control for that foreign firms may simply be more profitable and have access to more collateral, hence be a better investment for lending institutions. All firms (foreign, private and domestically owned, and State-owned) are credit rationed, including foreign firms. State-owned firms do not have an investment behaviour compatible with profit maximisation, a result which emphasises the soft budget constraint persistence (but not through the providing with soft credit). For these firms, wages increase together with investment.Investment, credit rationing, soft budget constraint, ownership, transition to a market economy, Hungary

Barter in Russia: Liquidity Shortage versus Lack of Restructuring

The rapid growth of barter is one of the most surprising phenomena in Russia: As a percentage of industrial sales it steadily increased from 5% in 1992 to nearly 55% in 1998. Unknown in CEEC's transition countries, barter is only one aspect of the Russian economy's demonetisation [process, along with dollarisation, growing arrears, and the widespread use of veksels and offsets. Barter is often seen as the consequence of the lack of restructuring, but some authors argue that it is a mechanism used to avoid shutting down potentially viable firms, in a context of market imperfections. The implications differ depending on the analysis chosen: in the first case, an expansionary monetary policy might not be appropriate, while the contrary is true if the demonetisation process jeopardizes potentially good enterprises. This paper aims to assess this phenomenon in the Russian economy. The paper's main contribution to work in this field (reviewed and documented in section II) is to highlight two different rationales for barter. Before studying the latter more closely, section III uses official monthly data collected by the central bank of Russia, the Goskomstat, and the Russian Economic Barometer (REB), to emphasize the macro-economic features of barter in Russia, and, more specifically, the link between monetary policy and bartering activity. It appears that macroeconomic policy and macroeconomic indicators are unable to explain the whole process. In section IV, quarterly statistics for 1995 and 1996 taken from the REB survey of roughly 200 firms make it possible to implement a more qualitative survey. The conclusion is striking: barter is used by potentially viable firms as a way of avoiding closure, while at the same time financing increasing inventories and soft goods in the case of indebted firms who use barter transactions, bank credit and choose to accumulate arrers in order to avoid restructuring.http://deepblue.lib.umich.edu/bitstream/2027.42/39655/3/wp271.pd

A new look at the Feldstein-Horioka puzzle : an "European-regional" perspective

The purpose of this paper consists in assessing the extent of financial integration in the European Union using the Feldstein-Horioka criterion. More precisely, we test the cross-correlation of savings and investment rates across the regions of the European Union, using regional data from Regio and national statistical offices, over the period 1995-2000. Several important outcomes are reported by our article. First, we find that the financial integration seems to be realized inside each country, and we are able to rationalize the few puzzles we face. Second, we find that overall financial integration between EU regions is almost complete. After performing additional investigations on consistent sub-groups of regions, however, our analysis discards the illusion that the sole suppression of institutional barriers to capital mobility would be sufficient to achieve a perfect financial integration. In that spirit, our main finding is that History, language, borders and distance as a proxy for transaction and information costs, still matter.Enigme de Feldstein-Horioka, épargne et investissement régionaux, marchés de capitaux, flux financiers.

Keynesian and Austrian Perspectives on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth

The 2010 European debt crisis has revived the discussion concerning the optimum adjustment strategy in the face of asymmetric shocks. Whereas Mundell's (1961) seminal theory on optimum currency areas suggests depreciation in the face of crisis, the most recent emergence of competitive depreciations, competitive interest rate cuts or currency wars questions the exchange rate as an adjustment tool to asymmetric economic development. This paper approaches the question from a theoretical perspective by confronting exchange rate based adjustment with crisis adjustment via price and wage cuts. Econometric estimations yield a negative impact of exchange rate flexibility/ volatility on growth, which is found to be particularly strong for countries with asymmetric business cycles and during recessions. Based on these findings we support a further enlargement of the European Monetary Union and recommend more exchange rate stability for the rest of the world.Exchange rate regime, crisis, shock adjustment, theory of optimum currency areas, Mundell, Schumpeter, Hayek, competitive depreciations, currency war.

Growth and crisis in transition : a comparative perspective

The paper provides an empirical analysis of the growth performance of transition countries in a comparative perspective, separating episodes of crises from those of growth. Performance is measured by the output response following recessions, rather than average rates of growth that aggregate periods of recessions and periods of growth. Results highlight significant differences between transition and non-transition countries, and heterogeneity within the transition group. Distinguishing the performance following the so-called "transitional recession" from that of "normal recessions", the analysis allows separating the role of initial conditions, pre-transition, from the effects determined by the economic structure that emerged after the launch of market reforms. The post-recession behavior of output in Central-Eastern Europe resembles that of emerging and developing countries in the aftermath of banking and financial crises, often following significant liberalizations. In contrast, the post-crisis performance of CIS countries resembles the output response observed during episodes of civil wars, and remains significantly different from the normal response of an average market country. Therefore, the ability to rebound after a crisis is a key element of the growth performance of different transition countries. Furthermore, we distinguish three components of the growth performance associated to a crisis, namely the capacity to rebound, the depth and the lenght of the crisis. We observe that such performance depends on economic reforms and especially on the complementarities among different reforms.Recessions, crises, reform complementarities, transition.

Barter in Russia: Liquidity Shortage versus Lack of Restructuring

The rapid growth of barter is one of the most surprising phenomena in Russia: As a percentage of industrial sales it steadily increased from 5% in 1992 to nearly 55% in 1998. Unknown in CEEC's transition countries, barter is only one aspect of the Russian economy's demonetisation [process, along with dollarisation, growing arrears, and the widespread use of veksels and offsets. Barter is often seen as the consequence of the lack of restructuring, but some authors argue that it is a mechanism used to avoid shutting down potentially viable firms, in a context of market imperfections. The implications differ depending on the analysis chosen: in the first case, an expansionary monetary policy might not be appropriate, while the contrary is true if the demonetisation process jeopardizes potentially good enterprises. This paper aims to assess this phenomenon in the Russian economy. The paper's main contribution to work in this field (reviewed and documented in section II) is to highlight two different rationales for barter. Before studying the latter more closely, section III uses official monthly data collected by the central bank of Russia, the Goskomstat, and the Russian Economic Barometer (REB), to emphasize the macro-economic features of barter in Russia, and, more specifically, the link between monetary policy and bartering activity. It appears that macroeconomic policy and macroeconomic indicators are unable to explain the whole process. In section IV, quarterly statistics for 1995 and 1996 taken from the REB survey of roughly 200 firms make it possible to implement a more qualitative survey. The conclusion is striking: barter is used by potentially viable firms as a way of avoiding closure, while at the same time financing increasing inventories and soft goods in the case of indebted firms who use barter transactions, bank credit and choose to accumulate arrers in order to avoid restructuring.barter, non-monetary transactions, virtual economy, Russia, transition

The Political Business Cycles in the EU enlarged

International audienceThe rationale behind the EU enlargement has been extensively debated3. Several authors emphasised the lack of convergence between old and new members, and the risk of jeopardizing economic growth by limiting the room for political adjustment, others considered that the process of enlargement was a way of anchoring the transition towards the market, of stabilising the economies, and of accelerating the speed of convergence and catching-up. The most popular analytical framework used for assessing the pros and cons of the enlargement of the EMU is the OCA (Optimal Currency Area) theory. Basically, the theory tells that in the absence of economic symmetry, two countries are less likely to benefit from a common currency, and that if they do, the task will be easier with flexible markets.More recent studies go further by demonstrating that the process of monetary unification is an endogenous process. Once the political decision of entering a common market and sharing the same currency has been taken, business cycles become more synchronized - thanks to the increase in intra-industry trade amongst others - internal openness increases, capital marketimperfection vanishes, contributing to ease the financing of backward regions

Education, corruption and growth in developing countries

Education is key in explaining growth, as emphasized recently by Krueger and Lindahl (2001). But for a given level of education, what can explain the missing growth in developing countries ? Corruption, the poor enforcement of property rights, the government share of property rights, the government share of GDP, the regulations it imposes might influence the Total Factor Productivity (TFP thereafter) of a country's economic system. A number of empirical papers emphasize the consequences bad institutions have on growth, but few are examining the link between education, corruption (more generally bad institutions) and growth. Our model assumes that at low level of GDP per head and high level of corruption education spending has no impact on growth. The slope gets positive only at above critical size of corruption. The implications are tested using the data set of Xavier Sala-i-Martin, Gernot Doppelhofer and Ronald I. Miller (2004), which is extended with the aggregate governance indicators of Kaufman et ali.Public spending, education, corruption, endogeneous growth.