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Working Paper Series in Economics
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No. wp2019-07
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- Juan Carlos Cuestas
- On the evolution of competitiveness
in Central and Eastern Europe: is it broken?
In this paper we aim to analyse the evolution of the real exchange rate (RER)
as a measure of competitiveness for a group of Central and Eastern European
countries. To do so, we apply unit root tests with breaks and estimate equations
with structural breaks. The results show that even though RERs have become
flatter, which means less competitiveness is lost against main trading partners,
they have become less mean reverting, meaning that shocks now tend to have
longer effects. Policy conclusions are derived from this analysis
- JEL-Codes: C22, F15
- Keywords: real exchange rates, Central and Eastern Europe, structural breaks, European integration
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No. wp2019-06
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- Merike Kukk and Natalia Levenko
- Macroeconomic imbalances and loan quality
in panels of European countries
The paper investigates the relationship between loan quality and macroeconomic
imbalance indicators. We use the local projection method to estimate
the response of non-performing loans (NPL) to changes in the cyclical component
of macroeconomic factors. The estimations are run for three country groups of
Western European countries, Central and Eastern European countries, and Southern
European countries. The results show that a rise in the output gap is followed
by a rise in NPL in all country groups, while NPL responds to the unemployment
rate in the Central and Eastern and Southern European countries. Inflation and
real unit labour costs are positively related to NPL in all country groups, though
they are estimated with large uncertainty in some country groups. The findings
suggest that it is useful to monitor imbalances in the output gap, unemployment,
inflation and labour costs together with credit indicators to assess the ensuing dynamics
in NPL.
- JEL-Codes: E32, E44, G21, P52
- Keywords: non-performing loans, macroeconomic imbalances, cyclical component, local projection method, unit labour costs
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No. wp2019-05
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- Jaanika Merikull and Tairi Room
- Are survey data underestimating the inequality of wealth?
This paper uses administrative data from registers and survey data from interviews
to analyse unit and item non-response in a wealth survey. It draws on the
Estonian Household Finance and Consumption Survey dataset, where the survey
data on income and wealth are complemented by information on the same variables
from administrative sources for all the people sampled. The results show
that the non-response contributes to the underestimation of wealth inequality in
the survey data, as the Gini coefficient is underestimated by 6 percentage points
and also the top wealth shares are substantially underestimated. The downward
bias is originating from item non-response and not from unit non-response. Imputation
can address the problems caused by item non-response across most of the
net wealth distribution, but does not eliminate the downward bias at the top of the
wealth distribution.
- JEL-Codes: D31, E21
- Keywords: wealth distribution, unit non-response, item non-response, participation bias, wealth survey, income survey, Household Finance and Consumption Survey, Estonia
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No. wp2019-04
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- Jaanika Merikull, Merike Kukk and Tairi Room
- What explains the gender gap in wealth? Evidence from administrative data
This paper studies the gender gap in net wealth. We use administrative data on
wealth that are linked to the Estonian Household Finance and Consumption
Survey, which provides individual-level wealth data for all household types. We
find that the unconditional gender gap in mean wealth is 45% and that it is caused
by large wealth disparities in the upper end of the wealth distribution. The structure
of assets owned by men is more diversified than that for women. Men own
more business assets and vehicles, while women own more deposits. The gender
gaps in these asset components cannot be explained by observable characteristics.
For partner-headed households the raw gender gaps across deciles are mostly in
favour of men, and more strongly so for married couples, indicating that resources
are not entirely pooled within households. For single-member households the raw
gaps across quantiles are partially in favour of women. Accounting for observable
characteristics renders the unexplained parts of the gaps mostly insignificant for
all household types
- JEL-Codes: D31, J16, J71
- Keywords: gender gap, wealth, inequality, intra-household allocation of wealth, Estonia
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No. wp2019-03
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- Juan Carlos Cuestas, Nicolas Reigl and Yannick Lucotte
- The evolution and heterogeneity of credit
procyclicality in Central and Eastern Europe
This paper presents empirical estimates of bank credit procyclicality
for a sample of 11 Central and Eastern Europe countries (CEECs) for the
period 2000Q1–2016Q4. In the first step we estimate a traditional-type
panel VAR model and analyse the evolution of credit procyclicality in the
CEECs by comparing the impulse response functions for different business
cycle periods. The results confirm the existence of credit procyclicality
in CEECs and show that procyclicality is higher during boom periods.
Furthermore we observe the heterogeneity of credit procyclicality in the
different countries in our sample. To explain the cross-country heterogeneity
in credit procyclicality we construct an interacted panel VAR model
(IPVAR) and analyse whether bank level competition, proxied by the aggregate
Lerner index, constitutes a driving force of credit procyclicality.
Our findings indicate that bank competition affects credit procyclicality
and explains the differences in credit dynamics across CEECs. Specifically
we show that the reaction of credit to a GDP shock is on average higher
in a less competitive banking market.
- JEL-Codes: E32, E51, G20, D40, C33
- Keywords: credit cycle, business cycle, bank competition, interacted panel VAR, CEEC
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No. wp2019-02
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- Thomas Y. Mathä, Stephen Millard and Tairi Room
- Shocks and labour cost adjustment:
evidence from a survey of European firms
We use firm-level survey data from 25 EU countries to analyse how firms
adjust their labour costs (employment, wages and hours) in response to shocks.
We develop a theoretical model to understand how firms choose between different
ways to adjust their labour costs. The basic intuition is that firms choose the
cheapest way to adjust labour costs. Our empirical findings are in line with the
theoretical model and show that the pattern of adjustment is not much affected by
the type of the shock (demand shock, access-to-finance shock, “availability of
supplies” shock), but differs according to the direction of the shock (positive or
negative), its size and persistence. In 2010–2013, firms responding to negative
shocks were most likely to reduce employment, then hourly wages and then hours
worked, regardless of the source of the shock. Results for the 2008–2009 period
indicate that the ranking might change during deep recession as the likelihood of
wage cuts increases. In response to positive shocks in 2010–2013, firms were
more likely to increase wages, followed by increases in employment and then
hours worked suggesting an asymmetric reaction to positive and negative shocks.
Finally, we show that strict employment protection legislation and high centralisation
or coordination of wage bargaining make it less likely that firms reduce
wages when facing negative shocks.
- JEL-Codes: D21, D22, D24
- Keywords: shocks, firms, labour cost adjustment, wages, employment, hours, survey
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No. wp2019-01
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- Jacopo Bonchi
- Asset price bubbles with low interest rates:
not all bubbles are alike
I extend a standard two-period OLG model to investigate the interplay between
the risks of a binding zero lower bound and asset price bubbles in a low interest rates
environment. The nature of the bubble is crucial when the risk-free real interest rate
is low because there is a negative natural interest rate. Bubbles are fully leveraged
when they are sustained by borrowers, or they are fully unleveraged when they are
sustained by lenders. Leveraged bubbles emerge naturally when there is a negative
natural interest rate, and they are more likely to collapse. Unleveraged bubbles
appear, in contrast, if the natural rate of interest is extremely low and the probability
of the bubble bursting is not extremely high. Both bubbles are more likely to emerge
with a high inflation target and will potentially be larger, but only leveraged bubbles
substantially mitigate the risk of a zero lower bound episode by raising the natural
rate of interest
- JEL-Codes: E43, E44, E52
- Keywords: zero lower bound, low interest rates, asset price bubbles, inflation target
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No. wp2018-10
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- Tibor Lalinsky and Jaanika Merikull
- The effect of the single currency on exports:
comparative firm-level evidence
We investigate how adopting the euro affects exports using firm-level data
from Slovakia and Estonia. In contrast to previous studies, we focus on countries
that adopted the euro individually and had different exchange rate regimes prior to
doing so. Following the New Trade Theory we consider three types of adjustment:
firm selection, changes in product varieties and changes in the average value of
the exports that compose the exports of individual firms. The euro effect is identified
by a difference in differences analysis comparing exports by firms to the euro
area countries with exports to the EU countries that are not members of the euro
area. The results highlight the importance of the transaction costs channel related
to exchange rate volatility. We find the euro has a strong pro-trade effect in Slovakia,
which switched to the euro from a floating exchange rate, while it has almost
no effect in Estonia, which had a fixed exchange rate to the euro prior to the euro
changeover. Our findings indicate that the euro effect manifested itself mainly
through the intensive margin and that the gains in trade were heterogeneous across
firm characteristics.
- JEL-Codes: F14, F15
- Keywords: international trade, common currency areas, euro adoption, transaction costs, Slovakia, Estonia, firm-level data
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No. wp2018-09
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- Natalia Levenko
- Actual and perceived uncertainty
as drivers of household saving
- JEL-Codes: E12, E21, E24
- Keywords: household saving rates, European Union, financial crisis, labour income uncertainty, precautionary saving, unemployment, consumer expectations, system GMM
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No. wp2018-08
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- Kersti Harkmann and Karsten Staehr
- Current account dynamics and
exchange rate regimes in Central and Eastern Europe
The paper seeks to determine the factors that drive the current
account dynamics of the 11 EU members from Central and Eastern
Europe (CEE). Panel data models are estimated on annual data
for the period 1997–2017 and both domestic pull factors and
external push factors are included. The models are, as a key innovation,
estimated separately for floating and fixed exchange rate
regimes. The current account exhibits substantial persistence in
both cases. For the floaters, the current account has been driven
by domestic factors while external factors appear unimportant.
For the fixers, the current account has mainly been driven by external
factors, suggesting there is substantial vulnerability to external
developments. The analysis underscores the importance of
the exchange rate regime for the drivers of the current account
balance in the CEE countries.
- JEL-Codes: F32, F33, P33
- Keywords: current account balance, exchange rate regime, economic policies, Central and Eastern Europe
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No. wp2018-07
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- Nicolas Reigl and Lenno Uuskula
- Alternative frameworks for measuring credit gaps and
setting countercyclical capital buffers
This paper complements the standard Basel countercyclical capital buffer
framework by suggesting four additional measures for credit gaps that can be used
to measure the financial cycle and to decide on countercyclical capital buffers for
banks. The new measures behave similarly to the gaps calculated with the
standard Basel one-sided Hodrick-Prescott filter in long samples, but they have
the properties desired for countries with relatively short historical samples. While
the standard Basel credit gaps have been deep in negative territory for many
European Union countries since the Great Recession the new gaps are close to
zero and the buffers suggested are more in line with the countercyclical capital
buffer ratios that were in place in 2018.
- JEL-Codes: G01, E59
- Keywords: credit gaps, countercyclical capital buffer, Basel III, Estonia
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No. wp2018-06
(Download at EconPapers)
- Juan Carlos Cuestas
- Changes in sovereign debt dynamics
in Central and Eastern Europe
The aim of this paper is to shed some light on the degree of sustainability
of fiscal debt for a group of Central and Eastern European countries. We apply
a battery of time series econometrics methods to show how the financial crisis has
affected the debt-to-GDP ratio and how the ratio has behaved recently. The results
give us important insights into how governments in Central and Eastern Europe
have reacted to the accumulation of debt. We distinguish between two groups of
countries; one group where the sovereign debt stock stabilised after the crisis, and
another where debt has been accumulated more quickly in recent years. The
results provide important policy lessons for the authorities responsible
- JEL-Codes: C22, F15
- Keywords: Central and Eastern Europe, structural breaks, European integration
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No. wp2018-05
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- Juan Carlos Cuestas, Estefania Mourelle and Paulo José Regis
- Real exchange rate misalignments in CEECs:
have they hindered growth?
We study the impact of exchange rate misalignment on economic activity in
nine Central and Eastern European (CEE) economies. Exchange rate misalignments
are computed from country-specific long-run exchange rate relationships
with determinants suggested by open macroeconomic models such as interest rate
differentials or the Balassa-Samuelson effect. There was a clear reduction in
misalignments, but this has been reversed to some extent after 2008. Exchange
rate overvaluation has a negative impact on economic activity. The effect of misalignments
on economic activity seems to be nonlinear, as overvaluation has a
stronger effect than undervaluation. Other factors of economic activity, including
institutions, also show nonlinear effects
- JEL-Codes: O11, F41, F15
- Keywords: real exchange rate misalignments, growth, Central and Eastern European countries, panel smooth transition regression
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No. wp2018-04
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- Merike Kukk, Alari Paulus and Karsten Staehr
- Income underreporting by the self-employed in Europe:
a cross-country comparative study
This study is the first to provide comparative estimates of the extent of income
underreporting by the self-employed across countries in Europe. The estimates are
derived using the consumption method developed by Pissarides & Weber (1989)
and the data from the 2010 wave of the harmonised EU Household Budget Survey.
The estimations show that the share of income not reported by the selfemployed
is relatively large in many European countries, although with substantial
variation across the countries. There is some regional clustering, but the
shares of underreporting appear not to be related to the development level of the
countries. The results are robust to changes in the model specification, the
estimation method, and the choice of instruments, but are somewhat sensitive to
sample restrictions and the criterion used to define self-employed households
- JEL-Codes: H26, E21, E26, H24
- Keywords: ncome underreporting, self-employment, EU countries, household budget surveys
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