Focus on European Economic Integration Q1/07

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• Focus on European Economic Integration 1/07 (PDF, 2,3 MB) März 2007.

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• Developments in Selected Countries (PDF, 558 kB) Hildebrandt – Focus on European Economic Integration 1/2007 en 31.03.2007, 00:00:00

• Determinants of House Price Dynamics in Central and Eastern Europe (PDF, 350 kB) Égert. Égert, Mihaljek – Focus on European Economic Integration 1/2007 This paper examines the determinants of house price dynamics in Central and Eastern European (CEE) transition economies. While we emphasize the role of conventional fundamental factors, we also highlight the importance of transition-specific factors in house price dynamics in the region. We take a comparative approach by looking at various panels composed of eight CEE transition economies (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Lithuania, Poland and Slovenia) and 19 industrialized non-CEE OECD countries. The use of these panels provides insights into the common determinants of house prices for the two groups of countries and, at the same time, allows us to identify the reasons for important differences in house price dynamics across countries. Overall, this paper shows that the growth in house prices in Central and Eastern Europe can be explained fairly well by the development of conventional underlying fundamentals and transition-specific factors. en 31.03.2007, 00:00:00

• Are Euro Cash Holdings in Central and Eastern Europe Driven by Experience or Anticipation? Results from an OeNB Survey (PDF, 283 kB) Ritzberger-Grünwald, Stix. Ritzberger-Grünwald, Stix – Focus on European Economic Integration 1/2007 Although euroization is an important phenomenon in emerging markets, still very little is known about who holds how much euro and for what purposes. In this paper, we employ unique survey data to analyze various aspects of foreign currency holdings in five Central and Eastern European countries (CEECs). This allows us to study the impact of expectations and hysteresis on individual behavior. Our results show that a substantial share of the population in the countries under review holds euro cash. We find little evidence that inflation or exchange rate expectations are important determinants of euroization, whereas variables related to a country’s economic history seem to be of some significance. Our results also indicate that the demand for euro and its use in domestic payments increases as the date of euro adoption approaches. en 31.03.2007, 00:00:00

• Central Bank Independence in Southeastern Europe with a View to EU Integration – Revisited (PDF, 185 kB) Dvorsky. Dvorsky – Focus on European Economic Integration 1/2007 This contribution updates an analysis of central bank legislation in eight Southeastern European (SEE) countries published in 2004. It uses the ECB classification and examines functional, institutional, personal and financial independence. The relevant Treaty requirements serve as a benchmark for assessing the degree of legal central bank independence (CBI) already achieved in the respective areas. The author finds that since 2004 some SEE countries have achieved further progress in aligning central bank legislation with Treaty requirements. As in 2004, the degree of CBI continues to correspond largely to the respective country’s level of integration with the EU. The main remaining weakness can be found in the area of personal independence, in particular in the provisions on the dismissal of central bank top officials. Further crucial areas are the prohibition of monetary financing and provisions on loss coverage. The paper concludes that legal arrangements to protect the status of the central bank are a necessary, though not sufficient, prerequisite for CBI. In fact, the importance of practical implementation cannot be overestimated. en 31.03.2007, 00:00:00

• Are the Exchange Rates of EMU Candidate Countries Anchored by their Expected Euro Locking Rates? (PDF, 551 kB) Naszódi. Naszódi – Focus on European Economic Integration 1/2007 This paper examines whether the exchange rates of the Czech koruna, the Hungarian forint and the Polish zloty were anchored by the market expectations for their euro locking rates in the period from December 15, 2004, to August 3, 2006. First, I derive the process of the exchange rate as a function of the processes of the following three factors: latent exchange rate, market expectations for the euro locking rate and locking date. Then the expected final conversion rates are filtered. The time-varying volatilities of the state variables are estimated from cross-sectional data on option prices. en 31.03.2007, 00:00:00

• Predicting Currency Crises Using the Term Structure of Relative Interest Rates: Case Studies of the Czech Republic and Russia (PDF, 326 kB) Cuaresma, Slacík. Cuaresma, Slacík – Focus on European Economic Integration 1/2007 Among the plethora of early warning mechanisms for currency crises proposed in the literature, there is an approach which has received little attention so far. This rather simple early warning indicator relies on the term structure of relative interest rates, unlike the vast majority of such systems that are based on macroeconomic fundamentals to predict a crisis in a long- or medium-term horizon. It measures changes in market sentiment regarding the relative probability of a currency crisis to estimate the timing of a crisis within a very short time window. This indicator thus complements long-horizon models that have been widely used so far. We apply this method to currency crises in the Czech Republic in 1997 and in Russia in 1998 and fi nd evidence that the indicator would have performed well as a real-time predictor in both episodes of currency distress. en 31.03.2007, 00:00:00

• The Russian Nonfuel Sector: Signs of the Dutch Disease? Evidence from EU-25 Import Competition (PDF, 258 kB) Barisitz, Ollus. Barisitz, Ollus – Focus on European Economic Integration 1/2007 It is evident that the Russian economy is largely based on the energy sector. This fact has caused concern in academic circles as to whether Russia is to some degree affected by the Dutch disease, i.e. whether a sharp rise of commodity prices might result in an appreciation of the real exchange rate, which would undermine the competitiveness of manufacturing and could lead to the deindustrialization of the economy. We focus on this possible final outcome, which has not been studied much in the literature so far: We compare Russian industrial import growth (based on figures of the volume of EU-25 exports to Russia) with domestic industrial production growth (disaggregated by industries) in the period from 2002 to 2006. In all manufacturing sectors except electrical, electronic and optical equipment and strongly protected foodstuffs, Russian imports are found to be expanding faster than domestic output. In some sectors, imports have even exceeded domestic production. Import competition is therefore strong and rising. We conclude that Russia may be facing incipient deindustrialization at least in some parts of the manufacturing sector. This could indicate that the Russian economy has contracted the Dutch disease, although it should be noted that other factors could also have driven sectoral changes. While it is beyond the scope of our study to examine whether the other chain links of the Dutch disease hold as well, the study does provide evidence of some movements in the direction of deindustrialization, which is in line with the Dutch disease theory. en 31.03.2007, 00:00:00

• The Russian Oil Fund as a Tool of Stabilization and Sterilization (PDF, 141 kB) Astrov. Astov – Focus on European Economic Integration 1/2007 The favorable world oil price dynamics has resulted in mounting reserves in the Russian Oil Stabilization Fund (OSF). This has raised the issue of an adequate economic policy response. Initially, the OSF was set up to reduce the vulnerability of the budget to the oil price volatility and to sterilize the impact of oil-related foreign exchange inflows on the money supply. Our findings suggest that the OSF has been instrumental in achieving both goals: it has contributed to macroeconomic stability and has helped decouple the GDP growth rate from oil price dynamics. However, given the current size of the OSF and a widely shared expectation that oil prices will remain comparatively high, the present dilemma is whether the OSF should be increasingly spent or whether it should be saved as a wealth-generating vehicle. Spending from the OSF on a current basis has been resisted so far largely because of rampant corruption and fears of inflation. However, there are several arguments which may support a change in this policy stance. In particular, it seems that concerns about intergenerational solidarity are of minor relevance for Russia; investments in the country’s infrastructure are badly needed which, via productivity gains, might counteract the possible Dutch disease effects; moreover, spending on public sector wages could reduce incentives for corruption. en 31.03.2007, 00:00:00

• Highlights (PDF, 164 kB) Focus on European Economic Integration 1/2007 en 31.03.2007, 00:00:00

• Olga Radzyner Award for Scientific Work on European Economic Integration (PDF, 44 kB) Focus on European Economic Integration 1/2007 en 31.03.2007, 00:00:00

• Statistical Annex (PDF, 85 kB) Focus on European Economic Integration 1/2007 en 31.03.2007, 00:00:00