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Working Paper Series in Economics
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No. wp2014-7
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- Jaanika Merikull and Tairi Room
- One currency, one price? Euro Changeover related inflation in Estonia
This paper studies euro changeover-related inflation using disaggregated price level data. The difference-in-differences approach is used and the control group for the treatment country, Estonia, is built from 12 euro area countries. The Nielsen Company disaggregated price data are employed at product, brand and shop-type level. The results indicate that while the overall inflationary effect of euro adoption was modest, the effects were significantly different across various market segments. Changeoverrelated inflation was higher for products that were relatively cheaper than the euro area average. Inflationary effects were stronger in smaller shops.
- JEL-Codes: D49, P46, E58
- Keywords: euro, currency changeover, market concentration, consumer behaviour
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No. wp2014-6
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- Tairi Room and Katri Urke
- The Euro Changeover in Estonia: implications for inflation
Estonia changed over from the kroon to the euro in January 2011. This paper analyses the inflationary effect of this event. The analysis is based on the Harmonised Indices of Consumer Prices. The difference-in-differences method is employed where the treated group is Estonia and the control group consists of the other EU member states. The estimation results imply that the inflationary impact of the euro changeover was either insignificant or small in magnitude, depending on which treatment period is considered. The acceleration in inflation mostly occurred in the second half of 2010, during the six-month period prior to the adoption of the euro. Although the actual effect of the euro changeover on inflation was modest, most Estonian citizens felt that the introduction of the new currency increased consumer prices considerably.
- JEL-Codes: D49, P46, E58
- Keywords: euro, currency changeover, consumer prices, inflation
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No. wp2014-5
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- Fabio Filipozzi and Kersti Harkmann
- Currency hedge – walking on the edge?
We study whether it is possible to find optimal hedge ratios for a foreign currency bond portfolio to lower significantly the risk and increase the risk adjusted return of a portfolio. The analysis is conducted from the perspective of euro area based investors to whom short-selling restrictions might apply. The ordinary least squares approach is challenged with the optimal hedge ratios found by the DCC-GARCH approach in order to investigate whether time-varying hedging is superior to the standard constant hedge ratios found by OLS. We find that hedging significantly lowers the portfolio risk in domestic currency terms and improves the Sharpe ratios for both single instrument and equally weighted multi asset portfolios. Optimal hedging using the standard OLS approach and using time-varying hedging give similar results, the latter being superior to the first in terms of risk-adjusted return.
- JEL-Codes: C32, C58, G11, G15, G23, G32
- Keywords: optimal hedge ratios, portfolio risk hedging
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No. wp2014-4
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- Juan Carlos Cuestas and Karsten Staehr
- The great (De)leveraging in the GIIPS countries. Domestic credit and net foreign liabilities 1998–2013
This paper considers the relationship between domestic credit and foreign capital flows in the GIIPS countries before and after the outbreak of the global financial crisis. Cointegration analyses on the pre-crisis sample reveal that domestic credit and net foreign liabilities are cointegrated for Greece, Italy, Portugal and Spain, but not for Ireland. For the first four countries the long-run coefficient is in all cases around one, suggesting a one-to-one relationship between domestic leveraging and foreign capital inflows. Estimation of VECMs on data from the pre-crisis period shows that the adjustment to deviations from the long-run relationship takes place through changes in domestic credit for Greece and Italy, while the adjustment is bidirectional for Portugal and Spain. These results suggest that “push” from foreign capital inflows was an important factor in the pre-crisis leveraging. The deleveraging after the crisis was largely unrelated to developments in foreign capital flows
- JEL-Codes: F32, E51, E44, C32
- Keywords: leveraging, capital flows, financial crisis, cointegration
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No. wp2014-3
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- Juan Carlos Cuestas, Luis A. Gil-Alana and Paolo Jose Regis
- On the changes in the sustainability of European external debt: what have we learned
In this paper we aim to analyse the level of sustainability of external debt and, more importantly, how it has changed for a number of European economies. Given the severity of the crisis since 2008, we argue that the path of external debt burdens may have changed since the start of the crisis, given the concerns about debt accumulation in most countries. We follow the advice of Bohn (2007) and analyse the reaction of present debt accumulation to past debt stock, incorporating the possibility of endogenously determined structural breaks in this reaction function. We find that structural breaks happen in most cases after 2008, highlighting the importance of the policy measures taken by most governments.
- JEL-Codes: E31, E32, C22
- Keywords: external debt, sustainability, crisis
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No. wp2014-2
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- Merike Kukk
- Distinguishing the components of household financial wealth: the impact of liabilities on assets in Euro Area countries
The paper investigates the interdependence of household financial liabilities and assets, with special focus on the impact of liabilities on households’ holdings of financial assets. The paper uses the new ECB Household Finance and Consumption Survey from 2009–2010 covering euro area countries. The paper estimates a system of equations for households’ financial liabilities and assets, taking account of endogeneity and selection bias. The results indicate that higher household liabilities are related to lower holdings of financial assets. The findings are consistent with the hypothesis that wider use of credit leads to lower savings. The paper highlights that the distinction between the components of households’ wealth provides additional insights into households’ financial behaviour
- JEL-Codes: D14, E21, D12
- Keywords: household debt, household wealth, financial assets, liabilities, financial vulnerability
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