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Recent Working Papers
Inflation Dynamics and the New Keynesian Phillips Curve in EU-4
Borek Vašícek
WP No. 971
(October, 2009)
Abstract:
The paper seeks to shed light on inflation dynamics of four new EU member states (the Czech Republic, Hungary, Poland and Slovakia). To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds forward-looking component, the backward-looking one is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms.
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Jel Codes: C32, E31
Keywords: Inflation dynamics, New Keynesian Phillips curve, CEEC
INTERNATIONAL FINANCIAL INTEGRATION AND REAL EXCHANGE RATE LONG-RUN DYNAMICS IN EMERGING COUNTRIES: SOME PANEL EVIDENCE
Guglielmo Maria Caporale; Thouraya HADJ AMOR; Christophe Rault
WP No. 970
(October, 2009)
Abstract: The aim of this paper is to provide new empirical evidence on the impact of international financial integration on the long-run Real Exchange Rate (RER) in 39 developing countries belonging to three different geographical regions (Latin America, Asia and MENA). It covers the period 1979-2004, and carries out “second-generation” tests for non-stationary panels. Several factors, including international financial integration, are shown to drive the long-run RER in emerging countries. It is found that the new financial environment characterised by international financial integration leads to a depreciation of the RER in the long run. Further, RER misalignments take the form of an under-valuation in most MENA countries and an over-valuation in most Latin American and Asian countries.
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Jel Codes: C15, E31, F0, F31
Keywords: emerging economies, real exchange rate, financial integration, misalignment, second-generation panel unit-root and cointegration tests
ONCE BITTEN, TWICE SHY: EXPERIENCES OF A BANKING CRISIS AND EXPECTATIONS OF FUTURE CRISES
Shannon Mudd; Neven Valev
WP No. 969
(October, 2009)
Abstract: Survey data from Bulgaria show that people who had experienced a loss during a banking crisis are significantly more likely to expect a new crisis. This result holds despite 12 years between the earlier crisis and the survey, and the dramatically improved performance of the financial sector and the economy in the meantime. However, we find that earlier experiences affect expectations only for less informed individuals. Individuals who are more informed about the economy are unaffected by their prior experiences.
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Jel Codes: D8, G2
Keywords: banking crisis, trust, expectations
Monetary policy rules and inflation process in open emerging economies: evidence for 12 new EU members
Borek Vašícek
WP No. 968
(October, 2009)
Abstract:
This paper has three objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authorities of 12 new EU members. Using estimation of an augmented Taylor rule, we find that this setting was not always consistent with the official monetary policy. Second, we seek to shed light on the inflation process of these countries. To this end, we carry out an estimation of an open economy Philips curve (PC). Our main finding is that inflation rates were not only driven by backward persistency but also held a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability. The analysis of the conditional inflation variance obtained from GARCH estimation of PC is used for this purpose. We conclude that inflation targeting is preferable to an exchange rate peg because it allowed decreasing the inflation rate and anchored its volatility.
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Jel Codes: E31, E52, E58, P24
Keywords: open emerging economies, CEE countries, monetary policy rules, open economy Phillips curve, conditional inflation variance
China's economic cooperation related investment
Sumon Kumar Bhaumik; Catherine Yap Co
WP No. 966
(September, 2009)
Abstract: The Chinese state undertakes large scale investments in a number of countries under the auspices of economic cooperation related investment (ECI). While there are suggestions that it is an extension of China?s soft power aimed at facilitating Chinese FDI in those countries, often for access to natural resources, there is no systematic analysis of this in the literature. In this paper, we examine this investment of the Chinese state over time. Our results suggest that the pattern of investment is indeed explained well by factors that are used in the stylised
literature to explain directional patterns of outward FDI. They also demonstrate that the (positive) relationship between Chinese ECI and the recipient countries? natural resource
richness is not economically meaningful. Finally, while there is some support for the popular wisdom that China?s willingness to do business with a country is not strongly affected by its
level of corruption, there is much weaker support, if any, for the hypotheses that China favours doing business with countries where political rights are limited.
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Jel Codes: F21, F23, F49
Keywords: China; Economic cooperation related investment; Foreign direct investment; Natural resources; Institutional quality