Central, Eastern And Southeastern Europe Research Articles

Exchange Rate Regimes in Central, Eastern and Southeastern Europe: A Euro Bloc and a Dollar Bloc?

There are 13 countries in Central, Eastern and Southeastern Europe (CESEE) with floating exchange rate regimes, de jure. This paper uses the framework pioneered by Frankel and Wei (1994) and extended in Frankel and Wei (2008) to show that most of them have been tracking either the euro or the US dollar in recent years. Eight countries, all of them current or aspiring EU members, track the euro. Of the five countries keying on the US dollar in various degrees, all but one belong to the Commonwealth of Independent States. The paper shows that the extent to which each country’s currency tracks the euro (or the dollar) is correlated with the structure of its external trade and finance. However, some countries appear to track the EUR or USD to an extent which appears inconsistent with inflation targeting, trade or financial integration, or the extent of business cycle synchronization. The phenomenon is particularly pronounced among the countries in the CESEE euro bloc, which may be deliberately gravitating around the euro in anticipation of eventually joining the Euro Area.

A Fresh Look at Potential Output in Central, Eastern, and Southeastern European Countries

Was the postcrisis growth slowdown in Central, Eastern and Southeastern Europe (CESEE) structural or cyclical? We use three different methods—production function approach, basic multivariate filter, and multivariate filter with financial frictions—to evaluate potential growth and output gaps for 18 CESEE countries during 2000-15. Our findings suggest that potential growth weakened significantly after the crisis across most countries in the region. This decline appears to be largely due to stagnant productivity and weaker capital accumulation, which were associated with common external factors, including trading partners’ slow potential growth, but also decline in global trade and stalled expansion of global value chains. Our estimates suggest that output gaps in 2015 were largely closed in many countries in the region.

Exchange Rate Regimes in Central, Eastern and Southeastern Europe: A Euro Bloc and a Dollar Bloc?

There are 13 countries in Central, Eastern and Southeastern Europe (CESEE) with floating exchange rate regimes, de jure. This paper uses the framework pioneered by Frankel and Wei (1994) and extended in Frankel and Wei (2008) to show that most of them have been tracking either the euro or the US dollar in recent years. Eight countries, all of them current or aspiring EU members, track the euro. Of the five countries keying on the US dollar in various degrees, all but one belong to the Commonwealth of Independent States. The paper shows that the extent to which each country's currency tracks the euro (or the dollar) is correlated with the structure of its external trade and finance. However, some countries appear to track the EUR or USD to an extent which appears inconsistent with inflation targeting, trade or financial integration, or the extent of business cycle synchronization. The phenomenon is particularly pronounced among the countries in the CESEE euro bloc, which may be deliberately gravitating around the euro in anticipation of eventually joining the Euro Area.

A Fresh Look at Potential Output in Central, Eastern, and Southeastern European Countries

Was the post-crisis growth slowdown in Central, Eastern and Southeastern Europe (CESEE) structural or cyclical? We use three different methods--production function approach, basic multivariate filter, and multivariate filter with financial frictions--to evaluate potential growth and output gaps for 18 CESEE countries during 2000-15. Our findings suggest that potential growth weakened significantly after the crisis across most countries in the region. This decline appears to be largely due to stagnant productivity and weaker capital accumulation, which were associated with common external factors, including trading partners' slow potential growth, but also decline in global trade and stalled expansion of global value chains. Our estimates suggest that output gaps in 2015 were largely closed in many countries in the region.

Corporate NPL Portfolios in CESEE Countries: How Corporate Leverage and Debt Spillovers Affect Firm Performance

Private growth and investment in most of central, eastern and south-eastern Europe (CESEE) is still hampered by persistent financial distress in the corporate sector, resulting from the excessive debt taken on before the 2008 crisis. This paper looks at how this excess leverage affects firm performance in these countries. Apart from the negative impact of a firm’s own financial distress on employment and investment, we find that the most indebted companies negatively affect other firms too, and that these effects worsen during the financial crisis and are more severe for small and medium-sized firms. Therefore, resolving the issue of corporate non-performing loans can have far more widespread benefits than previously believed, with SMEs as the main beneficiaries.

Portfolio Diversification in the Sovereign Credit Swap Markets

We develop models for portfolio diversification in the sovereign credit default swap (CDS) markets and show that, despite literature findings that sovereign CDS spreads are affected by global factors, there is sufficient idiosyncratic risk to be diversified away. However, we identify regime switching in the times series of CDS spreads, and the portfolio diversification strategies may differ between regimes. The models trade off the CVaR risk measure against expected return. They are tested in an active management setting for Eurozone core, periphery, and Central, Eastern and South-Eastern Europe (CESEE) countries. Models are developed for investors with long positions in CDS, speculators that hold uncovered long and short positions, and hedgers with covered long and short exposures. The results compare favorably with the broad S\&P/ISDA Eurozone Developed Nation Sovereign CDS index. We also identify several issues that remain unexplored on the way to developing integrated risk management models for CDS portfolios.

Application of Is-Mp-Ia Model and Taylor Rule to Cesee Economies

Abstract In this paper, the extended framework of the IS-MP-IA model has been tested. Since the appearance of the Romer’s (2000) model, a bulk of studies with its extensions have been published. Perhaps, the most notable amongst them were those proposed by Hsing (2004, 2013) and Giese and Wagner (2006) - which are integral part of this paper. The application of the extended Romer (2000) model to selected Central Eastern and South Eastern Europe (CESEE) countries (Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Macedonia, Moldova, Romania, Russian Federation, Slovak Republic, Slovenia and Ukraine) shows that on an average, higher world output and lower world interest rate and inflation have positive effect on real output. A lower government consumption to gross domestic product (GDP) ratio also increases the real output. However, the insignificant government consumption implies that the Ricardian equivalence might hold in these economies. Hence, fiscal prudence is needed, and the conventional approach of real currency depreciation, in order to stimulate exports and raise real output, is not recommendable for the selected CESEE countries. The results from this paper can be useful for the policymakers and the academia. They prove the theoretical and empirical value of the Romer’s IS-MP-IA model. From a methodological point of view, we use generalised method of moments (GMM) estimator for dynamic panel data models, that is, first-differenced GMM.

Macro-financial linkages and bank behaviour: evidence from the second-round effects of the global financial crisis on East Asia

This paper studies the link between macro-financial variability and bank behaviour, which justifies the second-round effects of the global financial crisis on East Asia. Following Gallego et al. (The impact of the global economic and financial crisis on Central Eastern and South Eastern Europe (CESEE) and Latin America, 2010), the second round effects are defined as the adverse feedback loop from the slumps in economic activities and sharp financial market deterioration, which may influence the financial performance of bank, inter alia via deteriorating credit quality, declining profitability and increasing problems in retaining necessary capitalization. Differentiating itself from other research, this study stresses adjustments in four dimensions of bank performance and behaviour: asset quality, profitability, capital adequacy, and lending behaviour, assuming that any change in a bank-specific characteristic is induced by endogenous adjustments of the others. The empirical results based on partial adjustment models and two-step system GMM estimation show that bank’s adjustment behaviour is subject to the variation in the macro-financial environment and the stress condition in the global financial market. There is no convincing evidence to support the effectiveness of policy rate cut to boots bank lending and to avoid a financial accelerator effect.

Mapping capacity to conduct health technology assessment in Central, Eastern and South-Eastern Europe.

AimTo provide insights into the capacity to conduct health technology assessment (HTA) in Central, Eastern, and South-Eastern Europe (CESEE), taking account of technical, financial, networking, and human resources.MethodsAn e-mail survey of 257 CESEE key informants involved in HTA was undertaken between March and April 2014. Contact e-mail addresses were identified from the internet. The survey questionnaire consisted of 3 sections: i) characteristics of the organization performing HTA, (ii) networking in HTA, and (iii) resources allocated for HTA.ResultsThe survey was completed by 41 respondents representing a wide range of institutions from CESEE countries (response rate of 19.8%). Less than a quarter of respondents reported that their institutions had HTA-specific budgets, whereas the majority indicated that their institutions participated in HTA networks either at domestic or international levels. Although almost half of respondents indicated that their institutions offered HTA training, a shortage in skills training was suggested as the main barrier to HTA.ConclusionThis is the first survey to thoroughly assess the state of HTA capacity in the CESEE region. To strengthen HTA capacity, CESEE countries should increase financial, technical, and training resources. To strengthen collaboration, the European Union and other international bodies should assist existing HTA networks in fulfilling their regional activities through leadership, advocacy to local policymakers, funding, and technical assistance.

Foreign Direct Investment Flows and IMF Lending Programs. New Empirical Evidence from CESEE Countries

The aim of the paper it to assess the “catalytic effect” of IMF lending programs on foreign direct investment (FDI) flows to Central, Eastern and South-Eastern European (CESEE) countries during and after the latest global financial crisis. This paper provides new empirical evidence on this catalytic effect while controlling for banking stability. Our results show that IMF lending programs had a negative catalytic effect on FDI flows to emerging economies from CESEE over the period 1999-2013. Other key determinants of FDI flows to these countries are inflation, current account balance, level of education, and infrastructure.

From fiscal consolidation to fiscal optimization

The fiscal consolidation program in 2015 was a success. Despite this success, it is time to consider a switch away from the fiscal consolidation policy towards a fiscal optimization policy. By 'fiscal optimization policy' we mean a proper design of fiscal instruments that might lead towards the maximum potential rate of GDP growth. Relying on a panel regression model for 76 countries, the IMF recommended some guidelines for such an optimal fiscal policy in its latest regional report on Central, Eastern, and Southeastern European (CESEE) countries. In this paper we test the IMF's recommendations in a different analytical framework based on the QUEST_Serbia Dynamic Stochastic General Equilibrium (DSGE) model. We endogenize all fiscal revenue instruments, update macroeconomic data, and estimate the model's coefficients using Bayesian technique. We also develop a new analytical tool for the decomposition of Impulse Response Functions (IRF), which helps us to reduce complex dynamic non-linear general equilibrium relations to simpler linearized relations between endogenous variables and key state variables. Our findings support a general IMF suggestion in the particular case of the Serbian economy for reducing fiscal duties on labor and capital inputs, as well as public consumption and transfer payments. We, however, do not support increasing VAT rates or expanding public investments unless some additional conditions are met.

Does Supply or Demand Drive the Credit Cycle? Evidence from Central, Eastern, and Southeastern Europe

Countries in Central, Eastern, and Southeastern Europe (CESEE) experienced a credit boom-bust cycle in the last decade. This paper analyzes the roles of demand and supply factors in explaining this credit cycle. Our analysis first focuses on a large sample of bank-level data on credit growth for the entire CESEE region. We complement this analysis by five case studies (Latvia, Lithuania, Montenegro, Poland, and Romania). Our results of the panel data analysis indicate that supply factors, on average and relative to demand factors, gained in importance in explaining credit growth in the post-crisis period. In the case studies, we find a similar result for Lithuania and Montenegro, but the other three case studies point to the fact that country experiences were heterogeneous.

Does Supply or Demand Drive the Credit Cycle? Evidence from Central, Eastern, and Southeastern Europe

Countries in Central, Eastern, and Southeastern Europe (CESEE) experienced a credit boom-bust cycle in the last decade. This paper analyzes the roles of demand and supply factors in explaining this credit cycle. Our analysis first focuses on a large sample of bank-level data on credit growth for the entire CESEE region. We complement this analysis by five case studies (Latvia, Lithuania, Montenegro, Poland, and Romania). Our results of the panel data analysis indicate that supply factors, on average and relative to demand factors, gained in importance in explaining credit growth in the post-crisis period. In the case studies, we find a similar result for Lithuania and Montenegro, but the other three case studies point to the fact that country experiences were heterogeneous.

Fishing in the same pool: Export strengths and competitiveness of China and Central, Eastern and Southeastern Europe at the EU-15 market

We investigate the impact of the emergence of China as a global competitor on the trade performance of Central, Eastern and Southeastern European (CESEE) countries at the EU-15 market, i.e. the fifteen EU members as of 1995. The main aim of the paper is thus to challenge the common view that China crowds out exporters from European markets. The paper takes a comprehensive approach in terms of empirical methods and data. We analyze export growth, export market shares, extensive and intensive margins and the dynamics in the number of joint trade links (Dynamic Trade Link Analysis), applying highly disaggregated data at the 6-digit HS level over the period 1995–2010. We show that the most contested markets are those for capital goods and transport equipment, product categories where both regions have gained market shares and comparative advantage. We show that the number of trade links at the product level where both regions are active has increased substantially, indicating intensified competition. At the same time hardly any trade links were lost, which points against cut-throat competition between CESEE and China. The decomposition of export growth along the extensive versus the intensive margin shows that in line with the literature, the deepening of already existing trade relationships (i.e. the intensive margin) contributed most strongly to export growth in both regions, whereas the contribution of new trade links (i.e. the extensive margin) had only a minor contribution, apart from the instance of EU accession, which boosted the extensive margin considerably. We further decompose intensive margin growth into demand related structural effects and a supplier related competitiveness effect. Both the CESEE region and China successfully intensified their trade linkages above all as a result of their outstanding competitiveness as shown by the econometric shift-share analysis. While this suggests that both regions pursue a suitable export strategy, further diversification of production towards promising new industries and markets will become increasingly crucial for both, especially in face of projected slower EU-15 market growth in the longer run.

X-INEFFICIENCY OF COMMERCIAL BANKS IN THE COUNTRIES OF CENTRAL, EASTERN AND SOUTH-EASTERN EUROPE

It is sometimes attempted to measure the productive efficiency of the banking sector in a direct way. This approach uses the concept of X-inefficiency introduced by H. Leibenstein. In general, the X-inefficiency is the difference between efficient behaviour of the supplier and his real behaviour. One of the main reasons for the existence of X-inefficiency is the lack of competitive pressure, due to which the maximization of profit ceases to be a precondition of market survival. This may lead to wasting resources. X-inefficiency exists when the cost of the production of a given good by the supplier is bigger than the lowest possible cost of producing this good. The aim of the article is to specify the level of competition in the banking services markets in the countries of Central, Eastern and South-Eastern Europe (CESEE) with the use of the cost inefficiency of banks. For this purpose data concerning the cost-to-income ratio ( ) in 2005-2011 are used. The data come from the BankScope database. In the study the distance from the pattern method was applied. This article adopts the hypothesis that the level of efficiency of banks is far from the pattern one and inefficiency indicates the imperfectly competitive market structure.

Do the Drivers of Loan Dollarisation Differ between CESEE and Latin America? A Meta-Analysis

In this paper we compare the determinants of loan dollarisation in two emerging market regions, namely Central, Eastern and Southeastern Europe (CESEE) and Latin America, by means of a meta-analysis of 32 studies that provide around 1,200 estimated coefficients for six drivers of foreign currency lending. One common pattern we identify is that macroeconomic instability (as expressed by inflation volatility) and banks’ funding in foreign currency play a significant role in explaining loan dollarisation in both regions. By contrast, the interest rate differential appears to be a key determinant only in Latin America, while the positive impact of exchange rate volatility on dollarisation implies a more prominent role for supply factors in the CESEE region. While the robustness of the results has been verified, our meta-analysis shows that estimates reported in the literature tend to be influenced by study characteristics such as the methodology applied and the data used.

Transformacja sektora bankowego w krajach Europy Środkowej, Wschodniej i Południowo-Wschodniej

This article attempts to assess the development of banking sectors in the transition countries of Central, Eastern and Southeastern Europe (CESEE) in years 1990–2011. There are evaluated the recommendations of international financial institutions with regard to the reform of the banking sector and a range of banking intermediation measured by the ratio of internal credit provided by the banking system related to GDP. The results of the evaluation of banking reforms allow positively assess the transformation of banking in the CESEE. Countries that consistently implement the adopted bank reform program, consisting of banking market liberalization and privatization of the commercial banking, have developed a secure, two-tier market oriented banking sectors. The depth of banking intermediation is still lower than it is in developed industrialized market economies, however, the distance between the CESEE countries and the adopted pattern in the second decade of reforms has decreased.

Business Cycle Convergence or Decoupling? Economic Adjustment in CESEE During the Crisis

We analyze business cycle convergence in the EU by focusing on the decoupling vs. convergence hypothesis for central, eastern and south eastern Europe (CESEE). In a nutshell, we fnd that business cycles in CESEE have decoupled considerably from the euro area (EA) during the financial crisis in terms of both cyclical dispersion (i.e. the deviation of output gaps) and cyclical correlation. The results are mainly driven by smaller countries, which can be explained by the fact that small economies seem to have larger cyclical swings as they are more dependent on external demand, which causes a decoupling in terms of higher output gap deviations from the EA cycle in times of economic crises. At the same time, this does not necessarily affect business cycle synchronization as measured by cyclical correlations, where the strength of the linear relationship of two cycles is measured. However, despite the recent declines in the co-movement, we generally observe high correlation levels of CESEE countries with the EA after their EU accession in 2004. Finally, we find a significant decoupling of trend growth rates between EA and CESEE until the onset of the financial crises. Since the beginning of the crisis, trend growth rates have declined both in CESEE and the EA with the trend growth differential decreasing significantly from about three to below two percentage points in 2011.

Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance

The paper investigates the non-performing loans (NPLs) in Central, Eastern and South-Eastern Europe (CESEE) in the period of 1998–2011. The paper finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors, though the latter set of factors was found to have a relatively low explanatory power. The examination of the feedback effects broadly confirms the strong macro-financial linkages in the region. While NPLs were found to respond to macroeconomic conditions, such as GDP growth, unemployment, and inflation, the analysis also indicates that there are strong feedback effects from the banking system to the real economy, thus suggesting that the high NPLs that many CESEE countries currently face adversely affect the pace economic recovery.

Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance

The paper investigates the non-performing loans (NPLs) in Central, Eastern and South-Eastern Europe (CESEE) in the period of 1998–2011. The paper finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors, though the latter set of factors was found to have a relatively low explanatory power. The examination of the feedback effects broadly confirms the strong macro-financial linkages in the region. While NPLs were found to respond to macroeconomic conditions, such as GDP growth, unemployment, and inflation, the analysis also indicates that there are strong feedback effects from the banking system to the real economy, thus suggesting that the high NPLs that many CESEE countries currently face adversely affect the pace economic recovery.