F36 - Financial Aspects of Economic IntegrationReturn

The infrastructure investment could strongly influence the economic growth in the Western Balkans countries and contribute to improved regional cooperation and reconciliation and to faster integration into the EU. However, it is essential that public investments in infrastructure are properly financed and managed. To measure the impact of infrastructure indicators on economic growth, panel regression analysis was used for the period 2000-2021, in six Western Balkan countries. The paper addresses the important question of how to intensify investments in infrastructure to achieve sustainable growth in the Western Balkans. The obtained results confirm the earlier findings about the significant impact of energy, ITC, and road infrastructure on economic growth in the Western Balkans.

Using developing countries in Europe for context, this study examines the complex relationship between financial crises and financial integration. We use panel data comprising 37 countries in Europe, including Iceland, Belarus, Ukraine, Turkey, and Russia from 2000-2019 and the general method of moments. Our findings show that there is a positive relationship between financial integration and development and economic growth. In addition, the results suggest that a higher degree of financial integration is not necessarily increasing financial fragility during a financial crisis. Therefore, the results show that it is a self-defeating policy for developing countries to apply a strategy of financial protectionism over a financial crisis.

Foreign banks have played a major role in Central and Eastern European economic landscape over the last decades. They have spurred banking intermediation and fuelled economic growth for years. However, the global financial crisis unveiled the other side of the coin. This article analyses foreign banks' lending behaviour in Central and Eastern Europe over the period from 2000 to 2016. It aims to investigate the nexus between bank loan growth, cross-border bank claims and the cycle period. Moreover, it captures the impact of the financial cycle on foreign banks' credit behaviour and highlights whether foreign bank ownership is influenced by host- and home-country effects. Our findings reveal the strong nexus between foreign banks' loan growth and cross-border bank claims. Also, we emphasize the pro-cyclicality of foreign banks' loan growth and cross-border bank claims. Furthermore, we see clear differences related to foreign banks' lending behaviour during normal and turbulent times, triggered by host- and home-country effects. These results raise policy challenges regarding the right bank ownership balance and the use of prudential regulation.

This paper brings to the foreground an indicator rather less used in specialized studies - the implicit tax rate of consumption - as an effective tax rate of consumption. In an empirical analysis, we try to analyse the impact of the main determinants on the implicit tax rate of consumption. The analysis is based on the panel technique in order to show the impact of tax harmonization on consumer taxation at EU27, EU15 and NMS12 levels, testing three hypotheses: (1) the implicit tax rate of consumption is directly influenced by the economic growth rate; (2) the effects of harmonization are more pronounced in the new EU member states; (3) during an economic crisis, the budget deficit and public debt determine changes in the implicit tax rate.

The article discusses which policies and to what extent should be financed from the EU budget and/or from the national budgets of the EU member states to satisfy the rationale and efficiency point of view. To answer these questions we discuss the existing approaches and apply the most relevant ones (in particular the theory of fiscal federalism and public sector economics) to examine the current structure of the EU budget expenditures. We conclude that there are few EU policies that would be more efficient if they were more fiscally centralized and there is a policy that should be brought down to national (regional) level.

This paper examines the role of structural change in the asymmetric adjustment of retail energy prices following changes in crude oil costs. The paper also examines the pattern of adjustment in retail energy prices when exchange rate is accounted for as part of the marginal cost of importing crude oil in European countries with high oil import dependency ratio. The paper shows that the results of Greenwood-Nimmo and Shin (2013) no longer hold when the structural change in the relationship between retail energy prices and crude oil costs is taken into the consideration. The paper also cautions that studies like Kristoufek and Lunackova (2014) that failed to account for exchange rate as part of the marginal cost of importing oil for countries with high oil import dependency ratio may be misleading. In fact, the results of this paper further indicate that once the exchange rate effect is taken into consideration, the possibility of rent-seeking behaviour in the gasoline markets of Italy and Spain disappears; while the rockets and feathers effect observed in most of the ex-tax gasoline, diesel, domestic heating oil and industrial fuel oil markets vanishes.

This paper analyses the impact of German macroeconomic news announcements and ECB meeting days on the conditional volatility of the Czech, Polish, and Hungarian Foreign Exchange markets as proxied by CZK/EUR, PLN/EUR, and HUF/EUR exchange rate returns over six years (2010-2015). A currency intervention period (11/2013-2015) in the Czech Republic is examined separately. EGARCH-type models with normal and Student's t-distributions are employed. The comprehensive analysis shows the following results. (i) The IFO index, Factory Orders increase and the PMI index from the Service Sector, the labour market data decrease conditional volatility of PLN/EUR. (ii) The IFO index and Industrial Production increase conditional volatility of HUF/EUR on the day of the announcement. (iii) Data from the labour market has a calming effect on CZK/EUR after the central bank launched currency interventions. (iv) IFO index increases and the PMI index from the Manufacturing Sector decreases conditional volatility of CZK/EUR before currency interventions were introduced (2010-11/2013).

The paper examines determinants of sovereign bond spreads (in relation to Germany) of the peripheral euro area countries in the period 2007Q3-2015Q3. The study indicates that the introduction of the Outright Monetary Transactions (OMTs) by the ECB in the third quarter of 2012 led to a change in the sensitivity of the spreads to the developments of certain macroeconomic fundamentals of these economies. In particular, the ratio of public debt to GDP, which significantly and strongly determined the spreads in the period 2007Q3-2012Q2, proved to be insignificant in the period 2012Q3-2015Q3. In addition, the counterfactual analysis carried out shows that the spreads in the analysed countries would have been much higher if the ECB had not decided to introduce this programme.

The macroeconomic announcements and their effects on stock markets are considered to be a measure of stock market integration. Earlier studies show that integrated stock markets exhibit immediate reaction to international macroeconomic news, whereas partially integrated or segmented markets mostly do not react to such announcements. This paper investigates the effect of surprises disguised in the macroeconomic announcements made by the European Monetary Union on CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) stock markets. Daily stock market data starting from January 1, 2007 to December 31, 2012 is analysed. The impact of macroeconomic announcements is estimated by using EGARCH model. The results show that the returns of four out of six CIVETS stock markets significantly react on the day of macroeconomic announcements, whereas the market volatility of all markets is affected due to the EMU's announcements. The results also show that not all types of announcements have significant impact on returns and volatilities in CIVETS, highlighting the importance of the contents of macroeconomic surprises.

The purpose of the paper is to analyse the current crisis of the eurozone. The irst part explains why the eurozone is not an optimum currency area. The second part points out that euro is an intensiier of the business cycle. The third part examines the Greek crisis. The fourth part explains the inner tensions in the eurozone. The ifth part asks whether euro is suitable for the countries of Central and East Europe. The sixth part examines the debt crisis within the eurozone.

This study analyses the directions and the degree of financial integration of ASEAN-5 with the PRC, India, the U.S. and Japan. A non-parametric approach has been used to study the crosscountry correlations based on Concordance Index (CI) and Rolling Concordance Index (RCI). Monthly stock market indices between January 1991 and June 2010 for all the countries involved were analysed. The CI results indicate higher financial interdependence of ASEAN-5 with the U.S. and Japan compared to the PRC and India. The stock markets RCIs amongst ASEAN-5 with the emerging and developed economies depict a rising financial integration amongst these nations. Financial integration amongst ASEAN-5 stock markets with the PRC has gradually increased but is still relatively lower compared to the financial integration with India, the U.S. and Japan. Thus, the financial portfolio diversification of ASEAN-5 to the PRC is recommended, especially if the financial crisis originates from the ASEAN region.

This paper investigates multiscale interdependence between the stock markets of Germany, Austria, France, and the United Kingdom. Wavelet energy additive decomposition was analyzed to investigate which scales capture the most energy (volatility), whereas a wavelet cross-correlation estimator was used to analyze comovement and lead/lag relationship between stock markets' return dynamics on a scale-by-scale basis. The main findings of the paper are as follows. First, major financial market crises had a significant impact on return volatility of investigated stock markets. Among them, the global financial crisis of 2007-2008 had the greatest and the most durable impact. Second, the lowest scale (associated with stock markets' return dynamics over a 2-4 days horizon) and the second lowest scale (associated with stock markets' return dynamics over 4-8 days horizon) MODWT (maximal overlap discrete wavelet transform) decompositions of stock markets' returns captured the greatest share (together about 70-80%) of indices' returns volatility. Third, comovement between stock market returns is a scale-dependent phenomenon. Fourth, a strong comovement between stock market returns of Germany, France, and the United Kingdom exists at all scales, while the Austrian stock market is less correlated with the three biggest stock markets in Europe. Fifth, the dynamics of stock market returns seems to be well time-synchronized at daily (raw returns) and the lowest scale (scale ) return decomposition as most of the return innovations are transmitted between stock markets intraday. Sixth, at the highest investigated scale (associated with stock markets' return dynamics over a 64-128 days horizon), significant leads and lags between dynamics of stock markets' returns were detected. The time-synchronization of the stock markets' return dynamics for investments of 64 to 128 days horizon is less perfect than for investments of shorter investment horizons.

We tested the hypothesis of procyclicality against the economic activity and stock exchange of Croatia - as a country preparing for EU accession - in order to investigate the spillover effect, i.e., the degree and pace of integration into larger financial markets such as the EU. The empirical findings obtained in application of OLS methodology for the 2000-2010 period provided evidence that EU accession is a trigger for a closer financial integration of a candidate country as Croatia; and a trigger for a rise in stock prices and economic revival, was reflected in by an increase in GDP and large FDI.

We investigate the influence which the financial condition of a multinational bank group may have on the lending rates of its affiliates, using data from the ten biggest banks in the Czech Republic under foreign control. The analysis is based on a theory of bank lending in which the implicit opportunity costs of lending by a foreign bank affiliate are influenced by the scarcity of funds within the multinational conglomerate. The theory predicts that parent banks' influence should be stronger in loan segments with more pronounced information asymmetry. Our empirical model, which explains the interest rate charged by the affiliate by means of affiliate-level controls and a parent influence variable, is tested for three categories of commercial non-financial borrowers (domestically owned firms, foreign-owned firms and the self-employed). Evidence of parent influence is found in a limited number of cases of banks and borrower classes for which the constraint on fund flow within the parent bank group is likely to be tight, particularly when the borrower class is of strategic importance for the affiliate's overall performance.

During different GDP growth regimes, the dynamics of global financial markets impacts the Slovenian stock exchange with varying intensity. We propose a smooth transition regression model to explain Slovene stock exchange index returns employing financial and macroeconomic variables. According to our model, the reaction of the stock market to several of the explanatory variables depends on the magnitude of GDP growth. The weaker relationship between Slovene stock exchange index returns and S&P 500 returns in the period of lower or negative GDP growth could be explained by less developed financial market in Slovenia and therefore not closely linked interchange of securities.

Real convergence is the key economic challenge for the new EU Member Countries. The main growth area today is the "new" entrepreneurial economy of creativity and innovation. But such an economy needs a financial structure capable of coping with the higher risk inherent in the "new" economy. To provide such a financial structure, the financial markets must be broad, deep and liquid, i.e. financial markets must be large enough to provide this financial structure. Hence, the financial integration became an imperative for the new Member Countries. But this integration process possesses both economic and political challenges and dilemmas. Answers to those challenges and dilemmas will then determine the degree of real convergence - and hence the degree of economic success - for each new Member State.

The article presents an empirically tested assessment of the Bank of Slovenia (BS), national central bank, adjustment policy to surges in capital flows during the last decade. Exchange rate appreciation, undeveloped banking sector, immoderate money market oscillation, unstable economic trends (all phenomena that can also be found in other transition countries) are just some of the detrimental effects that can be provoked by surges in capital flows if the national economy is faced with some fundamental sectoral deficiencies. Empirical results indicated that BS quite successfully mitigated listed effects of excessive foreign currency inflows during the last decade. With the suitable combination of direct and indirect adjustment methods, BS succeeded in preventing, still vulnerable Slovenian economy from a major form of financial crisis and stronger nominal tolar appreciation (this was not the case in some other countries like Hungary, Poland, Czech Republic, Croatia) although there was some real appreciation.

The paper discusses the prospects for capital inflows to the Czech Republic before Economic and Monetary Union accession. It reviews the potential costs and benefits of capital flows and the history of capital flows to the Czech Republic, before turning to future capital inflows. It notes that different theoretical models provide different predictions about future capital inflows. To get further insight, the paper discusses the future capital inflows from the perspective of nonresidents' supply of external savings and residents' demand for external borrowing and from the perspective of external vulnerability related to large foreign direct investment (FDI) inflow. It concludes that FDI is likely to decline somewhat in the future, but increasing sovereign borrowing needs could lead to higher inflow of portfolio capital. The final section discusses the potential for capital inflows resulting from the so-called convergence plays and concludes that there is presently little incentive for convergence-play related capital inflows.