F41 - Open Economy MacroeconomicsReturn

This paper examines exchange rate pass-through (ERPT) to prices in Central and Eastern European (CEE) countries, focusing on the Czech Republic, Poland, Hungary, and Romania. We employ a Structural Vector Autoregression (SVAR) model to analyse the transmission of exchange rate shocks to imported, producer, and consumer prices. Results indicate significant heterogeneity in ERPT across countries and price stages. While all countries exhibit higher pass-through for import prices, variations emerge in producer and consumer price responses. Monetary policy credibility and trade openness are found to influence ERPT dynamics. The findings highlight the importance of understanding ERPT for effective monetary policy in the region. Our results highlight the need for policymakers to consider the complex interplay between exchange rate fluctuations and domestic prices when formulating monetary policy strategies.

Motivated by the persistent rise in bilateral trade imbalance in Nigeria, this paper empirically examines whether Nigeria's four trading partners (China, India, the UK and the US) respond asymmetrically to changes in the oil price and exchange rate using a nonlinear autoregressive distributed lag model over the period from January 1999 to December 2019. Interestingly, we find that oil price increase and decrease influence Nigeria's trade balance with four trading partners asymmetrically. Further evidence indicates that oil price increases predominantly exert greater influence than decreases. Furthermore, Nigeria's trade balances with India and the UK in the long run and the US in the short run significantly respond asymmetrically to changes in exchange rate. In addition the result establishes significant evidence of the J-curve pattern in the response of Nigeria's trade balance with the UK to differences in exchange rate.

This paper investigates whether inflows of FDI and innovative activities act as a channel of knowledge spillovers in improving quality of countries' output. In measuring export quality, sophistication of a country's export basket is utilized. Utilizing panel data of countries for the period 2002-2015 and applying GMM methodology, the results indicate that the level of financial development, the quality of human capital and globalization of a country have a determinant role on the relation between knowledge spillover channels and the quality of exports. Patent applications generally positively affect sophistication of exports. FDI serves as a channel for knowledge spillovers to benefit the sophistication level of exports only for developed, more educated, financially developed and globalized countries.

In this article, we investigate the actual level of monetary policy independence in the Czech Republic. We formulate the research agenda in terms of the Euro Dominance Hypothesis. The situation of the non-euro EU countries with derogation in terms of joining the EMU, like the Czech Republic, is similar to the pre-euro situation of the euro area countries, in which the problem of the stability of the European Mechanism System was predominant. We investigate the co-movement of interest rates between the Czech Republic and the Eurozone to assess the potential costs of monetary integration. Using cointegration and VECM methods we show that the ECB monetary policy influences monetary policy in the Czech Republic and the actual level of monetary independence in the Czech Republic is much lower than it is presumed. Therefore, we argue that for the Czech Republic the cost of the joining the EMU will be lower than expected.

The purpose of this study is to determine the validity of the triplet deficit hypothesis, which means the savings gap and budget deficit effect on the current account deficit. The empirical model is estimated for the G7 countries during the period between 1994 and 2011. The findings show that budget deficit and savings gap have important role in current account deficit in terms of estimator results. Moreover, bi-directional causality between the current account deficit and the savings gap and between the budget deficit and the savings gap are determined. So, especially the savings gap has an important effect on the current account deficit and the budget deficit. That is, triplet deficit hypothesis is valid in G7. Moreover, traditional approach is also valid since the causality is found between the current account deficit and budget deficit. Thereby, the authors conclude that the choice of statistical tools in analysing the nature of relationship among the current account deficit, the budget deficit, and the savings gap may play a key role for policy makers.

The Czech Republic, Hungary, and Poland are set to join the Economic and Monetary Union (EMU) in the near future. This paper offers a framework for the quantitative evaluation of the economic costs of joining the EMU. Using an open economy dynamic general equilibrium model with sticky prices, we investigate the economic implications of the loss of monetary policy flexibility associated with EMU for each of these economies. The main benefit of this general equilibrium approach is that we can directly evaluate the effects of monetary policy in terms of welfare. Our findings suggest that the Czech Republic and Poland may experience sizable welfare costs as a result of joining the EMU. Results for Hungary are less striking as welfare costs in this country seem to be negligible in the benchmark economy. Nevertheless, costs of joining the EMU are higher if government shocks are important and when the trade share with the EMU is small.

The paper examines development of economic balance and efficiency of monetary and fiscal policy in the Czech Republic and Slovakia during the crisis with the help of empirical verification of Robert Mundell's model of effective market classification. Our main findings show that although there was no direct 'loser' during the crisis, the Czech Republic seemed to have better coped with its economic imbalances due to the independence of its monetary policy. Slovakia, on the contrary, has preserved several problems on the side of external balance. However, as both countries show certain differences, it is impossible to assess whether the euro adoption had the same effect on both of them. In general, the paper contributes to the research on the Czech and Slovak economy and euro area membership.

This paper attempts to assess how compatible China is with respect to its dollar-based exchange rate regime. Assessment is made in terms of the real convergence criteria suggested by the optimum currency areas (OCA) theory. In light of the endogenous problem in OCA analysis and this view of convergence criteria, the relevant features of China are evaluated against economies implementing rigid dollar standard in practice, namely Hong Kong, Macau, and Panama. Findings suggest that economic conditions in China broadly conform to those prevailing in these economies which maintain strong links to the US dollar.

The paper focuses on net external assets (NEA) in developed and transition countries in 1995, 2000, and 2005. The net international investment position is used as the main NEA indicator. In addition, alternative NEA estimates for developed countries are based on the cumulated current account, the cumulated financial and capital accounts, and the net factor income from abroad. The NEA estimates are divided by the gross domestic product (GDP) based on the U.S. dollar exchange rate. We identify the most important net creditors and net debtors, for which we study the average behavior of the real product growth, the unemployment rate, and the inflation rate among developed countries. We conclude that all the given estimates of NEA are good but imperfect.

We present rough estimates of net external assets for 8 regions and 51 states of the United States. These estimates have been derived from the data on gross state product and state personal income. We identify the largest creditors and debtors and observe relatively important disparities in net external assets across the states and regions. The analysis is also focused on various trends in the indebtedness of regional economies. Using the correlation matrices for selected base years, the degree of capital mobility across regions and states is quantiied. We provide some evidence that states are more open to capital lows than regions. In the end, the convergence of net external assets between 1980 and 2000 is conirmed.

This study is a contribution to the empirical literature on the significance of productivity shocks in explaining a high saving-investment correlation, using data from a panel of 21 OECD countries over the period 1970-2003. The study looks at the distributional properties of the productivity shocks in order to test if productivity shocks can relate saving to investment. To this end, we divide the countries into three groups with respect to the distributional characteristics of productivity shocks in each country with an application of the Fuzzy-c-means (FCM) clustering technique. The results provide some support for the productivity shock argument, indicating that the saving retention coefficients are greater for the countries subject to large productivity shocks in magnitude.

This article aims at investigating the nature of the causal relationship between immigration and economic development measured by GDP per capita in Norway using Granger causality test. The results on the unit root test indicate that all the series are non-stationary and are in I(1) process. The Johansen cointegration test reveals that there is no cointegration among the data sets. The Granger causality test shows that when the level of immigration increases, GDP per capita also increases. It has also been found that immigration has no impact on unemployment, and vice versa.

Computed fundamental real exchange rates in four new EU members point to difficulties in jointly entering the ERM II soon after the EU entry. Three currencies out of the four were overvalued prior to EU entry. Computations suggest that it is unlikely that the Czech, Hungarian and Polish economies will maintain low inflation during 2004 - 2010 and at the same time keep their currencies within the ERM II easily. Moreover, the experience of Greece, Portugal and Spain - viewed through fundamental real exchange rate goggles - indicates more stable real exchange rate paths and smaller currency misalignments prior to euro adoption than can be expected from the newcomers in the forthcoming years. If the newcomers sail too fast towards the euro, their sailing may not be as smooth as that of the front runners.

This paper uses a small-scale dynamic rational expectations model based on an openeconomy version of Fuhrer-Moore-type staggered wage setting to quantify the secondround effects of selected supply-side shocks and of shocks to the nominal exchange rate on wages and subsequently on inflation. In order to analyse the desired reaction of the central bank to these shocks, optimal time-consistent policy rules are derived within the presented New-Keynesian framework. The conclusions presented in the paper suggest that the second-round effects of shocks to import prices and the nominal exchange rate on inflation should not be ignored in practical policy-making.

Are there indications of real exchange rate misalignment in the case of the five pre-accession countries? Will stable real exchange rates, required by two of the Maastricht criteria, be in line with economic fundamentals in the pre-EMU period? In order to address these questions, we employ the concept of the fundamental real exchange rate (FRER). The FRER model approximates the integration gain with the impact of foreign direct investment on trade and allows for larger current account deficits if external debt is below a safety limit. According to the FRERs, there were signs of overvaluation for all the pre-accession economies, with the exception of Slovenia, at the end of 2001. The second main finding is that stability of real exchange rates will not automatically be in line with economic fundamentals in the forthcoming period. This suggests that some flexibility of exchange rates will be needed in the pre-EMU period.

The issue of determining inter-market foreign exchange flows under dual exchange markets has been hotly debated. Typically the literature has concentrated on the behavior of the financial premium, leaving aside equally important aspects such the reasons for and characteristics of incomplete separation. Our analytical results suggest that cross transactions arise as long as the government changes the commercial rate. Time inconsistency of policy brings opportunity for leakages between two markets. We also find that the more patient the government, the less likely the occurrence of commercial depreciation and leakages will be. Then reputation could be as a deterrent to leakages

The paper studies the compliance of the CZK - EUR exchange rate with the uncovered parity of returns on assets denominated in the two named currencies. A comparison with the same property for the euro-dollar rate is made. An uncovered total return parity (UTRP) formula is derived from the equilibrium in a portfolio optimization model with liquidity constraints. It is shown that the uncovered parity of total returns, and not of short-term money market rates, is a natural outcome of stochastic equilibrium asset pricing models that generalize the International Consumption-based Capital Asset Pricing Model. Accordingly, the traditional uncovered interest rate parity should be replaced by UTRP in empirical analysis. UTRP tests for the CZK/EUR and the USD/EMU currency pairs are conducted using yields of long-term government bond yields. UTRP typically holds, although the time horizons and measures of exchange rate movements, for which it becomes visible, may vary.