Switching to Good Policy? The Case of Central and Eastern European Inflation Targeters
Andrej Drygalla
Macroeconomic Dynamics,
forthcoming
Abstract
The paper analyzes how actual monetary policy changed following the official adoption of inflation targeting in the Czech Republic, Hungary, and Poland and how it affected the volatilities of important macroeconomic variables in the years thereafter. To disentangle the effects of the policy shift from exogenous changes in the volatilities of these variables, a Markov-switching dynamic stochastic general equilibrium model is estimated that allows for regime switches in the policy parameters and the volatilities of shocks hitting the economies. Whereas estimation results reveal periods of high and low volatility for all three economies, the presence of different policy regimes is supported by the underlying data for the Czech Republic and Poland, only. In both economies, monetary policy switched from weak and unsystematic to strong and systematic responses to inflation dynamics. Simulation results suggest that the policy shifts of both central banks successfully reduced inflation volatility in the following years. The observed reduction in output volatility, on the other hand, is attributed more to a reduction in the size of external shocks.
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07.05.2020 • 7/2020
Launch of IWH Bankruptcy Update: Number of corporate bankruptcies in Germany constant despite Corona crisis
Despite the Corona outbreak, the number of corporate bankruptcies in Germany so far remains at 2019 levels. This is according to the new IWH Bankruptcy Update provided by the Halle Institute for Economic Research (IWH) on a monthly basis and much earlier than official statistics.
Steffen Müller
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Capital Account Liberalisation Does Worsen Income Inequality
Xiang Li, Dan Su
IWH Discussion Papers,
No. 7,
2020
Abstract
This study examines the relationship between capital account liberalisation and income inequality. Adopting a novel identification strategy, namely a difference-in-difference estimation combined with propensity score matching between the liberalised and closed countries, we provide robust evidence that opening the capital account is associated with an adverse impact on income inequality in developing countries. The main findings are threefold. First, fully liberalising the capital account is associated with a small rise of 0.07-0.30 standard deviations in the Gini coefficient in the short-run and a rise as large as 0.32-0.62 standard deviations in the ten years after liberalisation, on average. Second, widening income inequality is the outcome of the growing income share of the rich at the cost of the poor. The long-term effect of capital account liberalisation includes a reduction in the income share of the poorest half by 2.66-3.79 percentage points and an increase in the income share of the richest 10% by 5.19-8.76 percentage points. Third, the directions and categories of capital account liberalisation matter. Inward capital account liberalisation is more detrimental to income equality than outward capital account liberalisation, and free access to the international equity market exacerbates income inequality the most, while foreign direct investment has an insignificant impact on inequality.
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Total Factor Productivity and the Terms of Trade
Jan Teresinski
IWH-CompNet Discussion Papers,
No. 6,
2019
Abstract
In this paper we analyse how the terms of trade (TOT) – the ratio of export prices to import prices – affect total factor productivity (TFP). We provide empirical macroeconomic evidence for the European Union countries based on the times series SVAR analysis and microeconomic evidence based on industry level data from the Competitiveness Research Network (CompNet) database which shows that the terms of trade improvements are associated with a slowdown in the total factor productivity growth. Next, we build a theoretical model which combines open economy framework with the endogenous growth theory. In the model the terms of trade improvements increase demand for labour employed in exportable goods production at the expense of technology production (research and development – R&D) which leads to a shift of resources from knowledge development towards physical exportable goods. This reallocation has a negative impact on the TFP growth. Under a plausible calibration the model is able to replicate the observed empirical pattern.
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What Drives the Commodity-Sovereign-Risk-Dependence in Emerging Market Economies?
Hannes Böhm, Stefan Eichler, Stefan Gießler
IWH Discussion Papers,
No. 23,
2019
Abstract
Using daily data for 34 emerging markets in the period 1994-2016, we find robust evidence that higher export commodity prices are associated with higher sovereign bond returns (indicating lower sovereign risk). The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find, first, that commodity-dependence is higher for countries that export large volumes of volatile commodities and that the effect increases in times of recessions, high inflation, and expansionary U.S. monetary policy. Second, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Third, the concentration of commodities within a country’s portfolio, its government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity-dependence.
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Short-term Economic Effects of a "Brexit" on the German Economy
Hans-Ulrich Brautzsch, Geraldine Dany-Knedlik, Andrej Drygalla, Stefan Gebauer, Oliver Holtemöller, Martina Kämpfe, Axel Lindner, Claus Michelsen, Malte Rieth, Thore Schlaak
IWH Online,
No. 3,
2019
Abstract
Many questions about Brexit remain open. It is still possible that the UK and the European Union will not be able to agree on a withdrawal agreement. In this case a so-called hard Brexit (No-Deal Brexit) would happen. We have examined the short-term effects of a hard Brexit for the German economy. In a first step, effects via the trading channel are estimated based on an input-output analysis of international and sectoral links. The result is a loss of 0.3% relative to gross domestic product. This magnitude also results from the international Halle Economic Projection Model, which takes into account macroeconomic repercussions. A hard Brexit would, in addition to the trade barriers, mean significant uncertainty for firms and households. On the demand side, this has a negative impact on investment activity and private consumption. Taken alone, these effects amount to 0.1% of gross domestic product. Overall, German gross domestic product could be dampened by several tenths of a percentage point in the one to two years following a hard Brexit. The automotive industry would probably suffer most. However, recommendations for discretionary economic policy measures aimed at dampening short-term macroeconomic effects or at individual economic sectors cannot be derived from this. The automatic stabilizers are sufficient given the expected magnitude of the effects.
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Spillovers of Asset Purchases Within the Real Sector: Win-Win or Joy and Sorrow?
Talina Sondershaus
IWH Discussion Papers,
No. 22,
2019
Abstract
Events which have an adverse or positive effect on some firms can disseminate through the economy to firms which are not directly affected. By exploiting the first large sovereign bond purchase programme of the ECB, this paper investigates whether more lending to some firms spill over to firms in the surroundings of direct beneficiaries. Firms operating in the same industry and region invest less and reduce employment. The paper shows the importance to consider spillover effects when assessing unconventional monetary policies: Differences between treatment and control groups can be entirely attributed to negative effects on the control group.
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