International financial competitiveness and incentives to foreign direct investment

In this paper an index of financial competitiveness is calculated that corresponds to the market-to-book ratio of inward FDI stocks. For a panel of five advanced economies from 1980 to 2006 it is shown that price competitiveness, stable inflation rates and registered patents have a positive impact on the index. Institutional factors like EMU membership or Anglo-Saxon legislation also play a role. Financial competitiveness in turn encourages FDI inflows whereas it benefits fixed investment relative to M&A. There is also some evidence that an innovative environment accelerates investment decisions by promoting competition among investors. --Competitiveness,foreign direct investment,international integration

Trade balances of the central and east European EU member states and the role of foreign direct investment

Given the large trade and current account deficits in some of the new EU member states the development of their external economic situation plays a role in assessing their aptitude to enter the European Monetary Union. The empirical analysis with aggregated data indicates that in the eight central and east European EU member states FDI and trade are complementary. This result is confirmed by an FDI enhanced gravity model which makes use of sectoral data provided by the Bundesbank's micro database direct investment (MIDI). The net effect of FDI on the trade balance is ambiguous, but FDI in high-tech industries clearly stimulates exports more than imports. Technological spill-over and the conglomeration of human capital seem to be important factors for the export performance. Against this background the prospects for the Czech Republic, Hungary, Slovenia and the Slovak Republic look more favourable compared to the Baltic states. --foreign direct investment,trade balance,gravity model

The international integration of money markets in the central and east European accession countries: deviations from covered interest parity, capital controls and inefficiencies in the financial sector

Based on the concept of covered interest parity it is shown that the money markets in Poland, the Czech Republic, Hungary, and the Slovak Republic meanwhile display a high degree of international integration with the euro area. Integration has strengthened continuously in the review period of 1999 to mid 2002. The segmentation that could still be observed stems from both restrictions on the short-term movement of capital and the limited development of the financial sectors in the four accession countries. While almost all capital controls have since been removed and will no longer play a role after accession to the EU, the implementation and transmission of the single monetary policy within the Eurosystem will possibly be impeded, if the financial sectors in CEE are then still underdeveloped. -- Basierend auf dem Konzept der gedeckten Zinsparität wird gezeigt, dass die Geldmärkte in Polen, der Tschechischen Republik, Ungarn und der Slowakei inzwischen einen hohen Grad an internationaler Integration mit dem Euro-Raum aufweisen. Die Integration hat sich im Untersuchungszeitraum von 1999 bis Mitte 2002 kontinuierlich verstärkt. Für die noch zu beobachtende Segmentierung sind sowohl Beschränkungen des kurzfristigen Kapitalverkehrs als auch die geringe Entwicklung der Finanzsektoren in den Beitrittsländern verantwortlich. Während Kapitalverkehrskontrollen inzwischen fast vollständig abgebaut sind und nach einem EU-Beitritt keine Rolle mehr spielen werden, könnte innerhalb des Eurosystems die Implementierung und Transmission der gemeinsamen Geldpolitik beeinträchtigt werden, wenn die Finanzsektoren in Mittel- und Osteuropa noch unterentwickelt sind.

Determinants of current account developments in the central and east European EU member states - consequences for the enlargement of the euro area

The current accounts of most EU member states in central and eastern Europe have been showing growing deficits in recent years. According to panel estimates the deficits can be attributed primarily to factors characteristic for the stage of development, ie the relative income level and high capital building. The positive impact of a closing income gap, however, is largely compensated by real appreciation. The net effect of government budget deficits is rather small, since they are mostly financed by private saving. Further integration of the financial sector is likely to improve the current accounts. Although the current account positions do not require fundamental policy reversals, there are clear risks of exchange rate adjustments that should be reduced before entering the euro area. --current account,new EU member countries,catching-up process

Währungspolitische Interdependenz der EU-Beitrittskandidaten und die Wahl eines geeigneten Wechselkurssystems: Beitrag für den Projektbericht: Währungspolitische Optionen für die mittel- und osteuropäischen Beitrittskandidaten zur EU

Der vorliegende Diskussionsbeitrag entstand im Rahmen eines Forschungsprojektes über die monetäre Integration von fünf mittel- und osteuropäischen EU-Beitrittskandidaten (Polen, Tschechische Republik, Ungarn, Slowenien und Estland). Das hier vorgestellte Kapitel geht auf die währungspolitischen Interdependenzen in der Region ein und zieht daraus Schlüsse für ein geeignetes Wechselkurssystem der genannten Länder. Dabei erweisen sich die Wechselkurselastizitäten des Sozialproduktes, die Korrelation exogener Schocks und die Priorität monetärer bzw. realer Ziele als die entscheidenden Variablen. In der gegenwärtigen Situation überwiegen die Nachteile fester Wechselkurse, die aus einer verminderten Reaktionsfähigkeit auf exogene Schocks beruhen, die Vorteile einer verringerten Wechselkursvolatilität. Der intensive Wettbewerb innerhalb Mittel- und Osteuropas (MOE) um Exporte in die EU und eine wachsende Bedeutung stabiler Wechselkurse gegenüber dem Euro könnten in der Zukunft allerdings einen gemeinsamen Übergang zu festen Wechselkursen sinnvoll erscheinen lassen. Gleichwohl bleibt ein generelles Fixkursregime einer währungspolitischen Koordination, etwa in Gestalt einer Schlange im Tunnel, in jedem Fall unterlegen. -- This paper is part of a research project on monetary integration of five EU-accession candidates (Poland, Czech Republic, Hungary, Slovenia and Estonia). The chapter presented here focuses on monetary policy interdependencies in the region and draws some conclusions on the adequate exchange rate regimes in Central and Eastern Europe (CEE). The exchange rate elasticities of output, the correlation of exogenous shocks and the priority of monetary or real targets turn out to be the decisive variables. At the present, the social costs of fixed exchange rates due to a reduced absorption of exogenous shocks outweigh the possible gains, which result from reduced exchange rate volatility. However, the strong competition of the selected countries for exports in the EU and a rising importance of stable exchange rates vis-à-vis the Euro may give an argument for a common switch to fixed exchange rates in the future. Nevertheless, it is argued that fixed exchange rates will always be inferior to monetary coordination in CEE, e.g. in the form of a snake in the tunnel.EWU,Transformationsländer,Wechselkurspolitik,Spieltheorie,EMU,Economies in Transition,Exchange Rate Policy,Game Theory

Timing and sequenzing der monetären Integration

Der vorliegende Diskussionsbeitrag entstand im Rahmen eines Forschungsprojektes über die monetäre Integration von fünf mittel- und osteuropäischen EU-Beitrittskandidaten (Estland, Polen, Slowenien, Tschechische Republik und Ungarn). Während die vorangegangenen Kapitel des Projekts die Vor- und Nachteile verschiedener Wechselkursregime für die Übergangsphase vor einer Teilnahme an der Europäischen Währungsunion herausarbeiteten, befaßt sich der vorliegende Beitrag mit dem Timing und Sequencing der monetären Integration. Er kommt zu dem Schluß, daß eine Wechselkurskooperation erst nach einer kurzen Phase völlig flexibler Wechselkurse empfehlenswert ist. Mit dem Beginn ihrer EU-Mitgliedschaft sollten die fünf Länder auch dem EWS II beitreten, untereinander allerdings engere Bandbreiten einhalten als gegenüber dem Euro. Eine Mitgliedschaft in der Europäischen Währungsunion wird gemäß den Bestimmungen des EG-Vertrags frühestens nach zweijähriger Bewährung im Europäischen Wechselkursmechanismus möglich sein, also voraussichtlich nicht vor 2005. -- This paper is part of a research project on monetary integration of five EU-accession candidates (Czech Republic, Estonia, Hungary, Poland and Slovenia). While the preceding chapters of the project have focused on the pros and cons of different exchange rate regimes for the transition phase before CEE countries may become member of the European Monetary Union, this paper deals with the Timing and Sequencing of monetary integration. It comes to the conclusion that an exchange rate co-operation should only start after a short period of fully flexible exchange rates and that the snake of five (or four) CEE-currencies should enter the EMS-tunnel at the same time as EUmembership is achieved. According to the rules of the EC-Treaty an accession to the Euro-area will only be possible after two years of successful EMS-membership, i.e. not before 2005.EWU,Transformationsländer,Wechselkurspolitik,EMU,Economies in Transition,Exchange Rate Policy

International comparison of stock market valuation: Evidence from a new index

This Kiel Policy Brief demonstrates the calculation of a new stock market index informing about the price competitiveness of a country's assets vis-à-vis its foreign competitors. In line with the portfolio balance approach we empirically identify net foreign holdings of a country's assets as the long-run driver of the index dynamics. Both, the index and its fundamental value are discussed for a number of important economies shading new light on the relative assessment of financial assets on international capital markets

What impact do global factors have on stock market movements in emerging market economies? A Short Note

[Conclusion] It is being increasingly held in the literature that, in a globalizing world, flexible exchange rates are no longer enough to insulate an economy against external shocks. Our empirical results corroborate the observation that, in the past few years, global factors have had a crucial impact on domestic financial market prices and that it is becoming increasingly difficult for EMEs to find shelter. Global liquidity, in particular, has been the dominant element of the evolution of financial markets in the emerging economies. What this means with respect to possible policy recommendations to EMEs on how they can best protect themselves from the adverse impact of volatile international capital flows is that neither flexible nor fixed exchange rates are capable of sheltering domestic financial markets from foreign shocks and of stabilizing the valuation of domestic financial instruments. What appear more promising are efforts to exploit the advantages of financial integration while at the same time taking precautions to ensure that external shocks can be absorbed by a sound financial sector with high standards of safety. In this connection, too, a stable macroeconomic environment can also help prevent temporary disruptions from becoming a full-blown hazard to macroeconomic stability

The international integration of money markets in the central and east European accession countries: deviations from covered interest parity, capital controls and inefficiencies in the financial sector

Based on the concept of covered interest parity it is shown that the money markets in Poland, the Czech Republic, Hungary, and the Slovak Republic meanwhile display a high degree of international integration with the euro area. Integration has strengthened continuously in the review period of 1999 to mid 2002. The segmentation that could still be observed stems from both restrictions on the short-term movement of capital and the limited development of the financial sectors in the four accession countries. While almost all capital controls have since been removed and will no longer play a role after accession to the EU, the implementation and transmission of the single monetary policy within the Eurosystem will possibly be impeded, if the financial sectors in CEE are then still underdeveloped.Basierend auf dem Konzept der gedeckten Zinsparität wird gezeigt, dass die Geldmärkte in Polen, der Tschechischen Republik, Ungarn und der Slowakei inzwischen einen hohen Grad an internationaler Integration mit dem Euro-Raum aufweisen. Die Integration hat sich im Untersuchungszeitraum von 1999 bis Mitte 2002 kontinuierlich verstärkt. Für die noch zu beobachtende Segmentierung sind sowohl Beschränkungen des kurzfristigen Kapitalverkehrs als auch die geringe Entwicklung der Finanzsektoren in den Beitrittsländern verantwortlich. Während Kapitalverkehrskontrollen inzwischen fast vollständig abgebaut sind und nach einem EU-Beitritt keine Rolle mehr spielen werden, könnte innerhalb des Eurosystems die Implementierung und Transmission der gemeinsamen Geldpolitik beeinträchtigt werden, wenn die Finanzsektoren in Mittel- und Osteuropa noch unterentwickelt sind