CEE Economies Research Articles

Gross Exports versus Value Added Exports: Determinants and Policy Implications for Manufacturing Sectors in Selected CEE Countries

The main objective of this paper is to assess the impact of selected determinants on both exports in value added and exports in gross terms for seven CEE economies, based on 13 manufacturing subsectors and for the period 1995-2011. The results of the analysis show a substantial decrease in domestic value added in a majority of the countries, especially in medium-high- and high-tech industries. For the seven CEE countries the impact of the main determinants (except vertical specialisation) are fairly similar when exports are measured in value added or in gross terms. The results indicate a greater impact of labour productivity and highly skilled employees on generating domestic value added in the manufacturing sector. CEE countries do not achieve comparative advantages of a capital-intensive nature in exports of manufactured products. Additionally, manufacturing in CEE countries does not serve a ‘carrier function’ for services to contribute to a country’s export performance.

Gross Exports Versus Value-Added Exports: Determinants and Policy Implications for Manufacturing Sectors in Selected CEE Countries

This article assesses the impact of selected determinants on both value-added exports and gross exports for seven CEE economies, based on thirteen manufacturing subsectors for the years 1995–2011. The results show a decrease in domestic value-added, especially in high-tech industries. The impact of the determinants, except for vertical specialization, is similar for exports in value-added and in gross terms. The results indicate that labor productivity and highly skilled employees have a greater impact on generating domestic value-added. CEE countries do not achieve comparative advantages of a capital-intensive nature. Manufacturing does not serve a “carrier function” for services.

Active and Passive Monetary Policy in CEE Countries with Inflation Targeting: The Case of the Czech Republic, Hungary, and Poland

The concept of nonlinear Taylor rules describing behavior of the central banks becomes popular in the literature. In this paper we estimate Markov switching Taylor rules for three CEE economies: the Czech Republic, Hungary and Poland, all being inflation targeters. For the robustness purposes we estimate several different specifications of the Taylor rule: backward- and forward-looking, with inflation and inflation gap as explaining variables. As the analyzed CEE countries are small open economies additional variables are included to the standard Taylor rule: foreign interest rate and exchange rate. We find that two regimes of monetary policy may be distinguished: passive and active regime. The passive regime, which seems dominant, is characterized by strong smoothing of the interest rate path and little response to inflation and output gap developments. In the active regime the smoothing parameter decreases and the reaction to inflation and/or output gap is stronger.

Comparative advantage of the EU in global value chains: How important and efficient are new EU members in transition?

We suggest original modifications and extensions of the recently presented methodological developments in ex-post accounting framework in global value chains in order to obtain empirical results both for the analyzed group of ten CEE economies as well as at a country-and-sector-specific level. The empirical results confirm that the role of the selected CEE economies in transition in creating value added with respect to the total value added in the European Union in the GVC framework was biggest in the cases of agriculture-, wood-products-, metal-production, and travel-and-tourism-related sectors. We also found that, after two decades of transition, the measures of productivity in the examined economies in 2009 were still much lower as compared to the EU average for most of the sectors. Moreover, in the transition period, these indexes were increasing, especially after EU accession. In contrary, after two decades of transition, the measures of capital efficiency in the ten CEE economies in 2009 were comparable to the EU average for most of the sectors. Moreover, during this period, the growth rates of these indexes were, in general, positive. However, their growth rates dropped after EU accession.

Valuation effect as a determinant of the international investment position in Central and Eastern European economies

The aim of this paper is to evaluate the significance of the valuation effect in determining the dynamics of the net international investment position of CEE economies. For this purpose an analysis of BoP and IIP time series for the four largest CEE economies (Poland, the Czech Republic, Hungary and Romania) for the years 2005-2013 was carried out. The exercise revealed that the valuation effect (VE) is, in the short run, the key determinant of net IIP changes (for most observed years). Nevertheless, in the long-run its influence decreases as valuation gains and losses tend to cancel each other out. As the VE is relatively volatile, it is important to analyse its dynamics over the mid and long-term when evaluating the IIP. The significance of the VE for determining net IIP dynamics turned out to be non-investment-type specific because valuations of both the short-term and long-term investments contributed in a large part to the change in the net IIP. Similarities in the dynamics of the VE in CEE countries prove that the VE depends to a large extent on the general price fluctuations in financial markets that nowadays exhibit strong correlations across countries.

Key sectors in the post-communist CEE economies: What does the transition data say?

This paper is the first study dedicated to the extensive examination of the dynamics of key sectors in CEE transition economies based on an application of the WIOD – an extensive database recently launched under the patronage of European Commission, Research Directorate General. We propose a modified approach to key sector analysis which extends applicability of the traditional methodology to the case of examining groups of countries over a period of time. More formally, the research was based on the maximum entropy decomposition of the Leontief inverse applied to the input–output tables covering the period 1995–2011. The results allow formulating the list of sectors, which, more or less, have preserved the status of the key sectors in CEE transition economies. In turn some sectors, especially the manufacturing ones, have significantly derailed while the sector of construction as well as the financial sphere and travel and tourism related sectors, have clearly gained in importance.

Ownership, interest rates and bank risk-taking in Central and Eastern European countries

We examine the impact of interest rates on bank risk-taking in 10 CEE economies and the Russian Federation for the 1997–2011 period taking explicitly into account the ownership status of banks, i.e., domestic vs. foreign owned. The results show that the risk-taking behavior differs between foreign and domestic banks. Foreign banks increased their risk-taking appetite as long run interest rates declined during the 2000s in all countries, while they behaved more aggressively in the 10 CEE countries, responding to the decline of the short term rates as well. This behavior stemmed mainly from higher capitalized banks. In turn, the risk-taking nexus is absent for domestic banks in the 10 CEE economies. Moreover, the solvency status of foreign banks remained essentially unaffected by monetary conditions in all countries while this does not hold for domestic banks in the Russian Federation.

Globalization and economic growth: Evidence from two decades of transition in CEE

This paper examines the role of various aspects of globalization for economic growth in ten CEE economies. In contrary to previous papers, we restrict our analysis solely to the first two decades of transition. Using the globalization indexes published by the Swiss Economic Institute, we found strong and robust evidence of growth-stimulating effect of globalization processes, especially in social and economic dimensions. On the other hand, the role of political dimension of globalization was not found to be statistically significant in any research variant.The result, which seems to be particularly interesting, is that the development of the internet, television and trade in newspapers (the social dimension of globalization) had at least as strong positive impact on economic development in CEE economies in the first two decades of transition as the rise in international trade, growth of foreign investment, reduction of import barriers and development of a tax policy (the economic dimension).

Estimation of the Impact of Oil and Gas Price Shocks on GDP Growth and Stock Returns in Central and Eastern Europe

This study attempts to estimate the path-through effects from oil and gas-related shocks to GDP growth and stock returns in twelve CEE countries using structural VAR approach recently developed in the literature. The baseline model is the global oil market model which endogenizes oil price changes. This model is modified by the author and applied to the European gas market. Then the impact of identified structural global oil and European gas-related shocks on GDP dynamics and stock market returns is studied using finite distributed lag models and another structural VARs. The study confirms recent findings that the factors behind oil and gas price changes do matter – different underlying shocks impact GDP growth and stock returns in the CEE region in different ways. It’s shown that in certain CEE countries oil and gas price increasing global and European aggregate demand shocks lead to higher GDP and positive stock returns over 6-8 months horizon despite the fact that some of these countries are net oil and gas importers. However, if fuels price increases are due to oil and gas-specific demand shocks, then GDP and stock prices tend to fall over 10-12 months horizon. In general, gas-related shocks were found more important for CEE economies and stock markets than oil-related shocks, what is in line with regional energy mix fundamentals.

Comparing monetary policy rules in CEE economies: A Bayesian approach

Using the Bayesian approach, a small open economy DSGE model was estimated using a sample of quarterly data for three Central and Eastern Europe economies, Czech Republic, Hungary and Poland. The hypothesis that central banks react to exchange rate movements was tested using posterior odds ratio. For these economies, evidence was found that central banks reacted to exchange rate changes. Evidence of similar monetary policy characterized by moderate or low gradualism as well as an active and conservative monetary policy was also found, for the selected countries. When a richer DSGE model featuring habit formation and imperfect pass-through is estimated, the results are generally similar. The inclusion of exchange rate in Taylor rule can also drastically change the dynamics of inflation and output following certain shocks.

The Determinants of Foreign Direct Investment in Central and Eastern Europe

This study explores the determinants of FDI in CEE economies based on a panel data model of 10 CEE countries over a period of 10 years. The aim of this research is to identify driving forces behind the decision of foreign actors to invest in the region. Three groups of relevant determinants are identified: traditional market- and efficiency-seeking factors as well as transition-specific variables. Fixed effects and random effects models are employed to compare the results of various estimation methods. Results suggest that besides the importance of traditional factors, the impact of transitional variables in the region should not be neglected.

Two Deficits and Economic Growth: Case of CEE Countries in Transition

The main goal of this contribution was to provide evidence on the dynamic interdependencies between economic growth and budget and trade deficits in ten new EU members in transition in the last decade. It is worth to note, that besides establishing directions of causal relationships this paper also derived some suggestions on signs of the dynamic dependencies analyzed. Outcomes of this paper confirmed that the budget deficits were significantly slowing down the GDP growth rates in case of new EU-members in transition. In addition, these deficits had negative impact on the convergence process of examined countries towards the highly developed European economies. The evidence supporting adverse causality was considerably weaker. The empirical results allow to claim that in the period under study there was a unidirectional negative Granger causality from budget deficits to trade deficits. Therefore, in case of CEE economies in transition the twin deficit hypothesis was not the case.

Two Deficits and Economic Growth: Case of CEE Countries in Transition

The main goal of this contribution was to provide evidence on the dynamic interdependencies between economic growth and budget and trade deficits in ten new EU members in transition in the last decade. It is worth to note, that besides establishing directions of causal relationships this paper also derived some suggestions on signs of the dynamic dependencies analyzed. Outcomes of this paper confirmed that the budget deficits were significantly slowing down the GDP growth rates in case of new EU-members in transition. In addition, these deficits had negative impact on the convergence process of examined countries towards the highly developed European economies. The evidence supporting adverse causality was considerably weaker. The empirical results allow to claim that in the period under study there was a unidirectional negative Granger causality from budget deficits to trade deficits. Therefore, in case of CEE economies in transition the twin deficit hypothesis was not the case.

Nonlinear dynamics in CEE stock markets indices

We investigate the existence of nonlinearities in the dynamics of the returns of stock markets indices from CEE economies. We use several types of nonlinear tests. We discuss the implications of the results with respect to the efficient market hypothesis.

Growth and Technology: The new economy in the 2000'S CEE countries and Romania

We use a concept of the new economy based on ICT and the inherent internal capacity to change the production patterns of producers. Thus, our results indicate that ICT is the main growth contributor (catching-up) of the years 2000 between inputs (Romania) and probably the main explication for the movement of the economies to economic growth based on the accumulation of capital and technology (CEE); large jumps and fluctuations of the technological factor probably reflect the cumulative effects of restructuring, narrowing the state sector and labor savings. We conjecture that, especially in Romania, the wave of restructuring is generated by the ICT boom; similarly, the growth contribution from labor quality is probably reflecting the massive mobilization of technology in the mid 2000s. The technological “mantra” of the new economy- faster, better, cheaper - seems to be supported by mutations in Romania and CEE economies.

Lost in Transition? The Returns to Education Acquired Under Communism 15 Years after the Fall of the Berlin Wall

Using data for 22 economies in Eastern and Western Europe, we find evidence that having studied under communism is relatively penalized in the economies of the late 2000s. This evidence, however, is limited to males and to primary and secondary education, and holds for eight CEE economies but not for the East Germans who have studied in the former German Democratic Republic. We also find that post-secondary education acquired under communism yields higher, not lower, payoffs than similar education in Western Europe.

Contagion of Financial Crises with Special Emphasis on Cee Economies: A Meta-Analysis

The paper offers new insights on the subject of financial contagion using a meta-analysis methodology and paying particular attention to the transition economies of Central and Eastern Europe (CEE). The results show that on average, asset market correlations have increased during turbulent periods, but the increase is rather moderate. When correlation coefficients are adjusted for the presence of heteroscedasticity, the increase is considerably smaller, but still statistically significant. The crises have been more and less contagious, but the level of development of the chosen afflicted country seems not to have played a significant role in determining whether crises spread there or not. Transition economies in CEE have on average been somewhat less susceptible to financial contagion than the sample as a whole, but the increase in the asset prices correlation during times of crisis is statistically insignificant. Interestingly, the financial contagion ‘snowball’ seems to have affected the CEE transition economies most after crises in the US rather than one in Russia or the Czech Republic.

Nominal and Real Convergence in Alternative Exchange Rate Regimes in Transition Countries: Implications for the EMU Accession

This paper discusses the processes of nominal and real convergence and their dependence on exchange rate regimes adopted in Central and Eastern European countries (CEECs) in the context of their future EMU accession. We focus our argument on the possibility of trade-off between the pace of disinflation and the maintenance of competitiveness and growth. Fixed nominal exchange rate shifts the burden of adjustment on to the tradable sector but whether this pressure results in faster restructuring and faster productivity growth or becomes a straightjacket for the economy is an open question. The paper implements a simple empirical assessment of convergence of inflation to EU levels and economic growth of 7 CEE economies which had adopted different exchange rate regimes in period 1993-2002. Results indicate that fixed exchange rates seem to have been a better tool of fighting inflation as compared to floating exchange rates or intermediate regimes. The presence of a fixed exchange rate has also been characterised by higher real GDP growth rates implying an absence of trade-off between nominal and real convergence in the investigated sample. Qualifications attached to these results are discussed.

The adoption of commercial innovations in the former Central and Eastern European markets

PurposeThis study aims to examine innovation adoption in the context of internet banking in Estonia.Design/methodology/approachThe data presented in this study are based on 1,831 questionnaires collected from individual internet banking users in Estonia.FindingsThis study extends the applicability of the innovation adoption model developed by Everett Rogers to Estonian internet banking. The model starts with the independent variables: relative advantage; complexity; perceived risk; and compatibility, and the analysis shows that relative advantage and complexity have the strongest influence on adoption of internet banking.Practical implicationsThe managerial implications of this paper include its contributions toward better understanding of the commercial viability in CEE economies of businesses based on Western‐style technology.Originality/valueThis study suggests modifications to Rogers' original model in order to apply it to the fast‐growing new CEE economies, thus reaffirming the importance of his model.

Alternative Fiscal Rules for the New EU Member States

The fiscal regime of new EU member states is dictated by the Stability and Growth Pact by virtue of EU membership and, for EMU candidates such as all new EU members are supposed to become soon, by the Maastricht Treaty. Such dual fiscal regime is somewhat perverse: Maastricht conditions in the year before EMU entry is assessed are significantly harder than SGP conditions before and after - a pointless hurdle. Most new members have fiscal difficulties: structural deficits, relatively low and mostly indirect taxation, widespread flat tax; failure to coordinate monetary and fiscal policy, and the fiscal shock of EU entry. The paper then discusses SGP criticisms and their relevance to CEE economies: neglect of the size of public debt, and of the share of public investment; failure to co-ordinate, within the Euro-area, both the fiscal policy of member countries, and the overall fiscal stance of the euro-area with ECB monetary policy; the inappropriateness of SGP rules to the principle of subsidiarity that shapes EU policy. The March 2005 reform has softened the SGP and considered some of these factors, but there is still considerable uncertainty in the EU authorities' discretionary powers, and Maastricht conditions remain rigid. The implications are likely delays in both fiscal consolidation and the introduction of the euro in many of the new eastern member states - unless they can get away with either cosmetic measures such as those pioneered by Italy and other member states, or unilateral euroisation - two options which are neither likely nor desirable. Recommendations include: 1) unification of fiscal deficit requirements of EU membership and EMU entry 2) formal non-discretionary modification of the fiscal deficit rules applicable to both EU and EMU in the directions of the March 2005 reform of SGP; 3) the relaxation of fiscal constraints for individual countries as long as the overall fiscal stance of the entire euroarea meets the criteria set for each country.