Central, Eastern And Southeastern Europe Research Articles

Financial Performance (Dis)parity in Post-transition Europe

Decades after the transition processes have spread across Central, Eastern, and South-Eastern Europe (CESEE), the former Soviet Union, and the Baltic, it was interesting to perform the post-transition and non-transition advanced European economies comparison to capture the outcomes of the 'catching-up process' . In this analysis, I tried to reach the results of this ‘catching process’ using the firm-level accounting data, namely, enterprises' annual accounts rather than countries' national accounts. The goal was to evaluate if post-tran- sition countries' enterprises have reached the financial performance of non-transition countries' enterprises across Europe, three decades after the transition processes began. The research captured firm-level financial performance aspects revealing some differentiators, namely, financial report indicators that differed for the enterprises belonging to post-transition countries in comparison with the ones belonging to non-transition countries in Europe. The findings related to the liquidity, solvency, indebtedness, profitability indicators, and labor intensity ratio were derived by logit regression models. The observations for 569 European companies were provided by Orbis Europe for the year 2021 annual accounts. According to the results, enterprises in post-transition countries, characterized by lower total assets and working capital scale, were likely to have lower profit margins, share of employees’ costs in operating turnover, current ratio, and gearing, while higher solvency and liquidity ratio. Mild marginal effects indicated the gap narrowed but with still existing significant disparities, particularly in the field of liquidity.

Foreign direct investment, domestic investment, and the role of institutions in Central, Eastern, and South-Eastern Europe

The paper examines the relationship between foreign direct investment (FDI) and domestic investment in Central, Eastern, and South-Eastern European (CESEE) countries from 1995 to 2021. The primary hypothesis posits that FDI exerts a positive influence on domestic investment, with variations observed across diverse institutional contexts. The research utilises fixed effects and a one-step difference generalised method of moments (GMM) to determine whether FDI leads to an increase or decrease in domestic investment in CESEE countries. The findings indicate that FDI has a favourable and statistically significant influence on domestic investment. However, the coefficients for FDI are less than one, indicating that while FDI stimulates overall investment, it does not create a crowding-in effect where the rise in total investment surpasses the FDI inflows. When the data is split on the basis of institutional quality, it is evident that FDI continues to positively impact domestic investment in high and low-institutional- quality settings. The coefficients for FDI in both subgroups are less than one, implying that institutional quality does not substantially change the correlation between FDI and domestic investment. These results indicate the positive and significant impact of FDI on domestic investment, without crowding-in effects for the entire sample of CESEE economies and both subgroups that differ in institutional quality.

The Resilience of Central, Eastern and Southeastern Europe (CESEE) Countries During ECB's Monetary Cycles

The Resilience of Central, Eastern and Southeastern Europe (CESEE) Countries During ECB's Monetary Cycles

New perspectives on CESEE insurance markets

AbstractThe insurance markets of Central Eastern and Southeastern Europe (CESEE) present a unique landscape characterized by intricate geopolitical and institutional dynamics. Despite being a relatively small region, the countries within CESEE navigate a complex political and institutional environment. The development of insurance markets across CESEE is marked by considerable disparities, reflecting diverse approaches to market reforms. Despite the markets being open, a lack of competition prevails, with a pronounced presence of multinational insurance groups and their foreign affiliates. This paper provides an update on current challenges in the region.

The contribution of bank intermediation to economic growth: Empirical evidence from CESEE countries

The financial system is the crucial supporter of economic growth, as it is said to be the “blood” of economic activities. Many studies reveal the role and importance of the financial system in promoting economic development by raising growth through the accumulation and utilization of savings for productive investments (Levine, 2005). However, some studies highlight a negative or non-significant relationship which may differ depending on the sample of countries and the applied methodology, proxy of financial development, time period, etc. Based on the relevance of the topic and on the ongoing debate, the aim of this study is to explore the nexus and contribution of banking intermediation in the economic growth of some Central Eastern and South-Eastern European (CESEE) countries for the period 2010–2020. We use regression methods, ordinary least squares (OLS), and a fixed effect model to investigate the relationship between economic growth and bank intermediation. We measure the development of banking intermediation using banks’ credit to the private sector, credit to government and state-owned enterprises. The research results show that credits provided by banks do not affect economic growth and are in fact negatively related to economic growth, whereas the return on equity is positively related to economic growth.

Higher Moments Actually Matter: Spillover Approach for Case of CESEE Stock Markets

The interconnectedness of stock markets is an important topic in empirical research, as spillovers on financial markets matter for asset pricing, portfolio allocation, financial stability, and risk management. This research focuses on all four moments of return distributions on stock markets and their spillovers between CESEE (Central, Eastern, and South-Eastern Europe) stock markets. Higher moments analysis needs to be explored more deeply, but can provide detailed insights into distribution shifts of market returns due to shocks in other markets. This research fills such a gap in the literature by estimating spillover effects between the four moments of stock market return distributions. Based on data from January 2013 to September 2022, the VAR (vector autoregression) model is estimated for individual moments across stock markets as a base for the calculation of spillover indices. The main findings indicate that it is difficult to track all the spillovers at once as the net emitter of shocks to one or other of the countries involved often change to being a net receiver and vice versa. Moreover, higher moments spillovers matter for individual markets, which has important implications for dynamic portfolio selection.

Modelling CESEE Countries Export Dynamics: Global Vector Autoregressive Approach

Abstract One of the main aspects of the transition process in Central, Eastern and Southeastern European (CESEE) countries was the trade liberalisation. As their financial systems are still underdeveloped and the trade channel is the dominant shock transmitter, this paper focuses on export dynamics for a selected set of CESEE countries. The employed methodology, Global Vector Autoregressive (GVAR) approach, allows modelling interactions and spillovers among countries. Furthermore, it enables joint modelling of exports and imports. This is of particular importance as the opening of new markets enabled astonishing export growth, but also opened the CESEE markets to foreign products. The empirical analysis reveals that a shock in German imports has a larger impact on CESEE countries’ exports than a shock in German output. Moreover, the results indicate that the role of the real exchange rate is less pronounced in comparison to previous similar research.

Keeping Up With the Novaks? Income Distribution as a Determinant of Household Debt in CESEE

This paper constitutes an initial attempt to shed light on the role of income distribution for household debt in Central, Eastern, and Southeastern Europe (CESEE). Using household‐level data from the OeNB’s Euro Survey for the period 2008–2018, we address the question whether interpersonal comparisons (“Keeping up with the Novaks”) are associated with the probability of having a loan and planning to take out a loan. Applying multilevel probit modeling to consider the hierarchical structure of the data, our results support the notion that higher income inequality is negatively correlated with the probability of having a loan at the bottom of the distribution, and positively at the top. We show this impact for almost all components of household debt, but evidence is strongest for mortgage and foreign currency loans. Loan plans are associated with income inequality at the very top of the income distribution.

The impact of macroprudential policies on capital flows in CESEE

In line with recent policy discussions on the use of macroprudential policies (MPPs) to respond to cross-border risks arising from capital flows, this paper tries to quantify which impact MPPs had on capital flows in Central, Eastern and Southeastern Europe (CESEE). This region experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to a tightening in the macroprudential environment, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model and include an intensity-adjusted macroprudential policy index to identify MPP shocks. Our results suggest that tighter MPPs translate into negative dynamic reactions of domestic private sector credit growth and gross capital inflow volumes in a majority of the countries analyzed. Level and volatility responses of capital inflows are often correlated positively, suggesting that if MPPs were successful in reducing capital inflows, they would also contribute to lower capital flow volatility. We also provide evidence that the effects of MPP tightening are in most cases stronger in an environment characterized by low interest rates, suggesting that MPPs would be more effective if conventional monetary policy were facing constraints.

An empirical investigation of determinants of life insurers’ performance: Evidence from selected countries in Central, Eastern, and Southeastern Europe (CESEE)

AbstractCentral, Eastern, and Southeastern Europe's life insurance market has received limited attention in the literature due to a lack of available data and lower level of maturity. However, part of the region is characterized by extraordinary growth rates, moderate to high concentration, a heavy presence of foreign affiliates, recent regulatory compliance, and low insurance culture. This study analyzes the firm‐specific, industry and macroeconomic determinants of life insurers’ performance in selected CESEE countries. We employ a dynamic panel GMM two‐step system estimator and uncover the most important drivers of life insurers’ profitability in the region. We find that size, leverage, liquidity, reinsurance, market share, and business growth matter for total profitability, while expense management drive underwriting profitability. The study expands the current literature on insurers’ performance by examining a neglected region and discusses location‐specific characteristics for foreign presence in the region.

Profiting on the Stock Market in Pandemic Times: Study of COVID-19 Effects on CESEE Stock Markets

This research deals with stock market reactions of Central Eastern and South Eastern European (CESEE) markets to the COVID-19 pandemic, via the event study methodology approach. Since the stock markets react quickly to certain announcements, the used methodology is appropriate to evaluate how the aforementioned markets reacted to certain events. The purpose of this research was to evaluate possibilities of obtaining profits on the stock markets during great turbulences, when a majority of the participants panic. More specifically, the contrarian trading strategies are observed if they can obtain gains, although a majority of the markets suffer great losses during pandemic shocks. The contributions to the existing literature of this research are as follows. Firstly, empirical research on CESEE stock markets regarding other relevant topics is still scarce and should be explored more. Secondly, the event study approach of COVID-19 effects utilized in this study has (to the knowledge of the author) not yet been explored on the aforementioned markets. Thirdly, based on the results of CESEE market reactions to specific announcements regarding COVID-19, a simulation of simple trading strategies will be made in order to estimate whether some investors could have profited in certain periods. The results of the study indicate promising results in terms of exploiting other investors’ panicking during the greatest decline of stock market indices. Namely, the initial results, as expected, indicate strong negative effects of specific COVID-19 announcements on the selected stock markets. Secondly, the obtained information was shown to be useful for contrarian strategy in order to exploit great dips in the stock market indices values.

Bank ownership and drivers of credit growth in Central, Eastern and South-Eastern Europe

AbstractIn this paper, we analyse the determinants of credit growth for banks operating in 20 countries in the post-communist Central, Eastern and South-Eastern Europe (CESEE). We focus on foreign-owned banks and the parent-subsidiary nexus against the background of all banks operating in this part of Europe. Our goal is to determine whether the macroeconomic and bank-specific determinants for host countries have a similar impact on the entire group of banks operating in CESEE and on its subset of foreign-owned banks and whether the rate of credit growth could be considered ceteris paribus equal across the foreign-owned and the complete set of banks in the CESEE. To this end, we use panel data regressions on approximately 4,600 bank-year observations over the period from 1995 to 2014. We conclude that the determinants of banks’ behaviour in the CESEE countries are consistent regardless of these banks’ ownership, the period and their EU membership. Although having a foreign investor expands the set of relevant determinants, the presence of such investors does not overshadow the importance of local conditions.

The Transmission of Euro Area Monetary Policy to Financially Euroised Countries

This paper provides a comprehensive analysis of the interest rate pass-through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroisation and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than one third of all euro retail rates in euroised countries of central, eastern and south-eastern Europe (CESEE) are linked to the euro area shadow rate. Compared to euro area monetary policy, the share of cointegration of the domestic monetary policy rate is lower, suggesting that domestic central banks in euroised countries with independent monetary policy can only partially control the `euro part´ of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission. JEL Classification: C22, C32, E43, E52, F42

The Impact of Macroprudential Policies on Capital Flows in Cesee

In line with the recent policy discussion on the use of macroprudential measures to respond to cross-border risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) – a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control – besides domestic macroeconomic quantities – for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility.

Viewpoint: service research in Post-Soviet states and the former eastern bloc

PurposeThis paper aims to improve the service discipline’s understanding of the unique challenges and opportunities that services marketers encounter in Central, Eastern and Southeastern Europe (CESEE) and Post-Soviet states. This paper also serves as an introduction to the special section about services marketing perspectives in this region.Design/methodology/approachConsidering the Post-Soviet reality, the paper is a viewpoint regarding the specific development potential of services marketing in the CESEE region. In addition, the three papers included in the special section use a variety of research methods, participants and service settings.FindingsFirst, this paper outlines the positive and negative consequences of the radical changes in the services markets over the past 30 years. Next, all three papers included in the special section explore the distinctive customer perspective of services marketing. Finally, this paper discusses the specific relationship building environment of the Post-Soviet reality and how its unique do-it-yourself background contributes to the existing discussion on consumers’ involvement in the co-creation of value.Research limitations/implicationsThe findings from this special section have valuable implications for future research on services marketing in the CESEE markets, although these may not always be generalizable beyond the unique context of the research detailed in each of these papers.Practical implicationsThis research, along with the three papers, presents some useful directions for services marketing managers cooperating with the CESEE markets, such as understanding and managing the expectations of their customers or employees.Originality/valueThis paper is one of the first attempts to understand the uniqueness of the under-researched area of services marketing in the CESEE and Post-Soviet States, both from a theoretical and empirical point of view. This also provides previously under-represented authors from the region the opportunity to present their perspective to an international service community.

Understanding sources of financial well-being in Romania: a prerequisite for transformative financial services

PurposeThe purpose of this paper is to investigate the extent to which financial behavior and financial well-being are affected by cognitive and non-cognitive factors in a specific Romanian post-communist context. This study shows that financial well-being is significantly linked to both financial education and to a set of non-cognitive factors. This paper offers strategic insights on what financial services should communicate to consumers and how they should be communicated, achieve the mutual benefits of the transformative paradigm.Design/methodology/approachThis study uses an online sample of 1,602 participants, representative of the general population in Romania concerning income and education, to collect data on financial anxiety, financial security and financial saving behavior (dependent variables), self-control, optimism, future orientation, deliberative thinking and financial literacy (independent variables). This paper measures the latent constructs – as composite indices, using partial least squares – path modeling. Working with WarpPLS software version 6.0 allows exploration of both linear and non-linear relationships involved in the model, along with their practical and managerial implications.FindingsThe results indicate that the key component to address in the development of financial services (in the post-soviet context) is financial anxiety. This study finds that, in contrast to Western countries, in Central, Eastern and Southeastern Europe (CESEE), financial education is not always a panacea. Additionally, financial security is not always the most important goal for consumers.Practical implicationsThis paper suggests managerial recommendations for redefining the relationship between banks and the Romanian population, focused mainly on diminishing financial anxiety and increasing financial security, as key elements of transformative financial services.Originality/valueThe study highlights the significant role played by behavioral variables in shaping financial well-being in Romania, being among the very few investigations illustrating the relevance of the topic in post-communist countries. This research shows unique challenges for the design of transformative financial services in a specific (post-communist) setting and provides insights on how financial services marketing can become more effective in the CESEE region.

Do ECB's Monetary Policies Benefit EMEs? A GVAR Analysis on the Global Financial and Sovereign Debt Crises and Postcrises Period*

AbstractThis paper studies the spillover effects of the ECB's monetary policies on non‐euro area countries, using a GVAR methodology, shadow rate for advanced economies (Wu and Xia, 2016) and shock identification through Cholesky decomposition. A euro‐area shadow interest rate hike triggers a broad‐based decline in output abroad, especially in Central, Eastern and South‐Eastern European (CESEE) economies, and a less widespread increase in short‐term interest rates. How countries respond to the shock depends on their characteristics: the spillover effects are transmitted mainly through the trade channel, while the short‐term interest rate channel plays a limited role. Results are robust to different model specifications.

Reopening the debate on the relationship among remittances, household consumption stability and economic growth in emerging markets

PurposeThe impact of remittances on household consumption stability and economic growth is not quite clear. This paper attempts to reopen the debate on the relationship among these three variables. The current remittance literature suggests that a decrease in household consumption volatility, induced by remittances, automatically leads to economic growth. This paper challenges these arguments by stating that, under certain circumstances, there is no automatic relationship among remittances, household consumption stability and growth.Design/methodology/approachThe authors approach the question from the perspective of emerging Central, Eastern and Southeastern European (CESEE) countries. The authors use the two-step system generalized method of moments (GMM) estimator with the Windmeijer (2005) finite-sample correction. To test the existence of the possible non-linear effects of remittances on household consumption stability and economic growth, the authors use threshold regressions.FindingsThe authors find that remittances significantly reduce household consumption volatility. They exhibit a consumption-smoothing effect on recipient households. This stabilizing effect happens not through the preventive role of remittances, but rather through their compensatory role. Remittances produce a weaker stabilizing effect on household consumption when the remittance to GDP ratio of the recipient country is above the estimated threshold level of 4.5%. The authors also find that there is a negatively significant and linear impact of remittances on growth. There is no evidence to suggest that remittances can foster productive investment and therefore promote economic growth in CESEE countries, which means that: (1) the remittances cannot be treated as a source of funds to invest in human and physical capital and (2) the remittances are compensatory rather than profit-oriented.Originality/valueAs far as the authors are aware, this is the first study that investigates the impact of remittances on both household consumption stability and economic growth simultaneously.

The impact of euro Area monetary policy on Central and Eastern Europe

This paper investigates the effects of a euro area monetary policy shock on Central, Eastern, and Southeastern Europe (CESEE). We use shadow rates as a proxy for the monetary policy stance and propose a novel way of treating euro area countries in a multi-country framework. More specifically, our approach allows to place sign restrictions on both euro area aggregate and single member states’ quantities. This procedure fully takes cross-country heterogeneity within the euro area into account and leads to shocks that are economically consistent between both layers of aggregation. Our results show that prices and output fall in response to the euro area monetary tightening, both within the euro area and the CESEE region but to a varying degree. The revealed cross-country heterogeneity in the size of the effects emphasizes the usefulness and importance of our empirical approach.

Foreign Direct Investment Attractiveness of Central, Eastern, and Southeastern European Countries: The Importance of Policy-Related Location Advantages

The paper aims to enhance the discussion about foreign direct investment (FDI) attractiveness of Central, Eastern, and Southeastern European (CESEE) countries, by focusing on those location determinants of FDI which fall within the scope of public policy. First, we summarize the literature on location advantages. Second, some general trends in FDI inflows to the CESEE region are outlined. Third, based on data for 15 CESEE countries in 2013 and 2017, we build a composite index, which allows us to rank countries in terms of their FDI attractiveness, as well as its most important policy-related dimensions, such as institutional framework, infrastructure endowment, labor force quality, and cost competitiveness. In addition to allowing comparison between economies across these dimensions, the results reveal areas in which some countries need improvement so that they can attract more FDI.