This paper examines the phenomenon of financial euroization in Albania, focusing on the liability side of the banking system. It explores some of the main theoretical and empirical determinants of deposit euroization in the context of the high euroization rates originating in the transition period of the early 1990s. Despite gradual improvements in the macroeconomic framework, euroization rates have continued to be persistent throughout, long after the reversal of the original triggers of such phenomenon. The high level of euroization entails policy relevant concerns for euroized economies, as it has been shown to have potential adverse effects on macroeconomic policies and financial stability, issues of vital importance for a central bank. Using a VAR framework to capture the simultaneous dynamic relationships between macroeconomic aggregates, this paper finds evidence that euroization rates are highly persistent in Albania, while being influenced by several factors such as interest rate differentials, exchange rates, and credit euroization.
This paper presents a DSGE model with banks that face moral hazard in management. Banks receive demand deposits and fund investment projects. Banks are subject to potential withdrawals by depositors which may force them into early liquidation of their investments. The likelihood of this happening depends on the bank management efforts to keep the bank financially sound and the degree of bank leverage. We study the properties of this model under different monetary and macro-prudential policy arrangements. Our model is able to replicate the pro-cyclicality of leverage, and provides insights on the interplay between bank leverage and bank management incentives as a result of monetary, productivity and financial shocks. We find that a combination of pro-cyclical capital requirements and a standard monetary policy are well suited to contain the effects on output and prices of a downturn, keeping the financial system in check. Yet, in an expansionary phase (i.e. a productivity shock) this policy combination may produce desirable results for some macro-variables but at the expense of a deterioration in other macro-financial indicators.
At the forefront of the economic consolidation of the euro area, banking integration came to a stall following the beginning of the 2008 crisis. Since then European banks started retrenching their asset holdings within national borders, effectively reducing the scale of their European operations. This paper explores the link between banking integration and fragmentation in the interest rate channel in the eurozone. Using a rolling VAR, I estimate the overtime evolution of the interest rate pass-through across European countries, and then I relate this evidence to banking integration dynamics. The results support the existence of a statistically significant and negative link between banking integration and cross-country differentials in the interest rate channel.
Global Value Chains (GVCs) have become a central topic in trade and development policy but little is known about their actual impact on economic performance because data availability has been limited. Using a new unique set of Inter-Country Input-Output tables with extensive country coverage, I look at the relationship between GVC participation and domestic value added at the industry-level to determine if and for whom GVCs are beneficial. I show that GVC participation is positively related to domestic value added along the value chain. However,this effect is only significant for middle- and high-income countries. Deriving novel source/destination country-specific indicators, I present evidence on theoretical transmission channels between GVCs and domestic value added that explain these results. More specifically, I find support for productivity enhancing effects through cost savings when richer countries source from low-wage countries. In contrast,low- and middle-income countries only benefit from technology upgrading and spillovers if they have sufficient levels of absorptive capacity.
This paper investigates the role of banks’ foreign asset holdings in transmitting credit risk internationally. Foreign exposure in risky assets might severely affect the solvability of credit institutions. Credit risk, in turn, transfers from banks to public accounts as a consequence of implicit or explicit bailout guarantees to distressed banking systems. This paper articulates this mechanism with a simple model where governments choose to fill banks' capital gaps to self-protect from the severe economic consequence of a banking sector default. Referring to the existing literature on the determinants of sovereign yield spreads in the second part of the paper, I present empirical evidence of the link between banks’ foreign claims and countries' credit risk. Results for the eurozone identify banks' foreign exposure as a major determinant of sovereign default probability. Also, governments' vulnerability to credit risk spill over decreases with banks' capitalisation and sovereigns' fiscal soundness.
The real unit labor cost is an important variable in today's debate over competitiveness and labor cost imbalances in the Eurozone. This paper documents the link existing between developments in the labor share and relative monetary policy stance across euro area members. First I present the theoretical foundations of such link using a standard New Keynesian framework, then I investigate empirically this relationship using a panel of countries from the Eurozone. I find evidence that real interest rates differentials are key determinants of the evolution of real unit labor costs across Europe. Policy implications are significant as in the Eurozone the problem of divergent labor cost competitiveness cannot be separated from the one of differentials in monetary policy stance. Within this logic the reduction of State cross-differences in product and market frictions (structural reforms) are necessary but not sufficient for the elimination of labor cost imbalances. Other persistent sources of inflation differentials should be addressed as, for example, fiscal stance.
In this paper, I apply three methods to estimate the output gap for Vietnam to support the conduct of monetary policy of the State Bank: the Hodrick-Prescott Filter, the production function approach and Bayesian estimation. I then compare the results obtained from these approaches and discuss their advantages and disadvantages to choose the optimal method for the estimation of the output gap for the State Bank of Vietnam. For the Bayesian approach, my paper closedly relies on the paper of Tim Willems (2011) with some modifications to fit the situation of Vietnam. The output gap estimated by Bayesian method appears to be the most consistent with the economic developments of Vietnam.
This paper uses probit and ordered probit methods to examine the impact of banks’ policies in terms of cost efficiency, capitalization, activity diversification, credit growth and profitability, on the loan quality in the Tunisian banking sector after controlling for the effects of firm-specific characteristics and macroeconomic conditions. Using a data set with detailed information for more than 9 000 firms comprising the portfolios of the ten largest Tunisian banks, we show that banks which are cost inefficient, low capitalized, diversified and small, are more likely to have a low quality of loans portfolios. However, bank’s profitability does not seem to offer an important contribution in explaining the loan quality evolution. Finally, our findings highlight the importance of taking into account firm-specific characteristics and macroeconomic developments when assessing the loan quality of banks from a financial stability perspective.
In this study, we investigate the nature and possible sources of economic fluctuations in oil exporting countries using principle component and impulse-response analysis. The principal component analysis shows that the first two components can be statistically significantly explained by world GDP, but not by oil prices. We further develop our study using impulse-response analysis and find that a global demand shock is as important as oil supply and oil demand shocks in determining the dynamics of macroeconomic variables of interest. Though previous studies in this field underline the importance of institutional factors, we find that rising global political and economic integration can play a critical role in explaining business cycles of these economies. With increasing integration into the world economic system, oil exporting countries have become more susceptible to world business cycles, the sources of economic fluctuations have become more diversified, and consequently, the role of oil has declined over time. These results have crucial policy implications for the role of the fiscal and monetary policy in managing economic fluctuations in these economies.
We measure the response of household consumption of different income groups to social spending during the 2002-2012 period using the aggregated Household Budget Survey Data. We find that households respond more strongly to changes in pensions than to changes in allowances and in-kind transfers. The very weak response of households to changes in allowances and in-kind transfers, both of which are transitory income, is consistent with the permanent income hypothesis. The estimates of pension elasticities suggest that the response of the low income group to changes in pensions is the strongest, whereas the response of the middle income group is the weakest. We further find that, in aggregate, households of all income groups do not exhibit habit persistence.
