Focus on European Economic Integration Q1/10

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• Focus on European Economic Integration Q1/10 (PDF, 1.7 MB) March 2010.

Studies and Analyses

• Bank Governance and Financial Stability in CESEE: A Review of the Literature (PDF, 268 kB) Gardó. Gardó – Focus on European Economic Integration Q1/10 This article explores the interrelationship between bank governance and financial stability in general and in the ten Central, Eastern and Southeastern European EU Member States (CESEE MS) in particular. Agency theory is used to illustrate that banks are engaged in multiple agency relationships. Within a conceptual framework, five main dimensions of bank governance are identified and analyzed, namely internal, external, corporate, institutional and international governance. Based on the pertinent literature, we subsequently review the agency problems the CESEE MS faced in their banking sectors on their way to installing efficient and sound banking systems in the 1990s. Their experience holds important lessons for the completion of banking reform in less advanced transition economies. Most importantly, banking sector restructuring should go hand in hand with a redesign of the incentive structures for all the relevant actors in the system. This seems to be a prerequisite for achieving and maintaining financial stability and improving the efficiency of capital allocation and economic growth prospects. Overall, the CESEE MS experience also provides useful insights for dealing with the ramifications of the current global financial crisis. en Governance, financial stability, transition economies G01, G14, G28, G34 Mar 31, 2010, 12:00:00 AM

• Could Markets Have Helped Predict the Puzzling Exchange Rate Path in CESEE Countries during the Current Crisis? (PDF, 601 kB) Cuaresma, Slacík. Cuaresma, Geršl, Slacík – Focus on European Economic Integration Q1/10 In the present paper we examine whether financial markets could have helped predict exchange rates in selected Central, Eastern and Southeastern European (CESEE) economies, namely the Czech Republic, Hungary and Poland, during the current financial crisis. To this end, we derive risk-neutral densities from the implied volatilities of FX options, which approximate market expectations about exchange rate developments. Based on these risk-neutral density estimates, we then assess the out-of-sample predictive power of indicators. The forecasting results suggest that models based on FX options are inferior to the random walk in terms of the forecasting error, confirming a stylized fact about the short-term forecasting of exchange rates. Yet, we also find that, for the Czech Republic and Poland, risk-neutral densities contain useful information on the direction of change of the exchange rate. en Options, implied volatility, risk-neutral density, exchange rate forecasting, Bayesian model averaging, subprime crisis, emerging markets C11, C32, C53, F37, G14, G17 Mar 31, 2010, 12:00:00 AM

• How Did the Global Financial Crisis Affect the CESEE Region and Latin America? – A Comparative Analysis (PDF, 333 kB) Backé, Gallego, Gardó, Martin, Molina, Serena. Backé, Gallego, Gardó, Martin, Molina, Serena – Focus on European Economic Integration Q1/10 This paper examines the impact the global economic and financial crisis had on two distinct emerging market regions, namely Central, Eastern and Southeastern Europe (CESEE) and Latin America. Similar to other emerging economies, both regions were initially surprisingly resilient as the crisis gathered momentum. They were, however, both strongly affected by the sharp retrenchment in capital inflows and the collapse of global demand that followed the demise of Lehman Brothers in September 2008. Notwithstanding differences in the channels of transmission and the intensity of the propagation, the short-term outcome in 2009 was similar for both regions: one of the deepest recessions in decades. At the same time, the worst case scenario of a fully-fledged financial meltdown occurred neither in the CESEE region nor in Latin America. en Financial crisis, Central, Eastern and Southeastern Europe, Latin America F15, F32, G01, G15, G18, H30 Mar 31, 2010, 12:00:00 AM

• Trade, Economic Structure and the Great Recession: The Example of Central, Eastern and Southeastern Europe (PDF, 109 kB) Francois, Wörz. Francois, Wörz – Focus on European Economic Integration Q1/10 As measured by the most recent monthly data, the trade collapse that had started in late 2008 has shifted into a rapid recovery phase. The simplest explanation that fits the facts is that trade has followed the sectoral composition of the recession. The recession has caused particularly strong declines of trade flows in heavy manufacturing, i.e. machinery, vehicles and related raw materials. This has translated into a deep manufacturing recession and an even stronger drop in trade. In particular, for CESEE countries these sectors are far more important in the composition of trade than they are in the composition of GDP. en trade collapse, industrial structure, Central, Eastern and Southeastern Europe F14, F15, O52 Mar 31, 2010, 12:00:00 AM

• Estimating Price Elasticities on the Hungarian Consumer Lending and Deposit Markets: Demand Effects and Their Possible Consequences (PDF, 299 kB) Holló. Holló – Focus on European Economic Integration Q1/10 In this paper, we use bank product and consumer level data and estimate a random coefficient logit model (RCL) to calculate price elasticities on the Hungarian consumer lending and retail deposit markets in line with the most recent developments in the literature on discrete choice demand estimation. The findings indicate that, on average, demand for domestic currency-denominated loans is more price sensitive than demand for foreign currency loans. The results also suggest that there is an asymmetric substitution effect toward foreign currency- denominated loans as a result of a price increase of domestic currency-denominated loans (i.e. a rise in interest rates on HUF-denominated loans increases the demand for foreign currency loans more than a rise in interest rates on foreign currency loans increases the demand for HUF-denominated loans). Finally, as the substitution effect toward foreign currency-denominated loans is stronger, it might weaken the effectiveness of the interest and exchange rate channels of monetary transmission. en Price elasticity of demand, random coefficient logit model, monetary policy, financial stability E52, G21, L10 Mar 31, 2010, 12:00:00 AM

• Olga Radzyner Award 2010 for Scientific Work on European Economic Integration (PDF, 27 kB) Focus on European Economic Integration Q1/10 en Mar 31, 2010, 12:00:00 AM

• Articles Published in Focus on European Economic Integration in 2009 (PDF, 48 kB) en Mar 31, 2010, 12:00:00 AM