Showing papers in "European Journal of Comparative Economics in 2005"

Reforms and Economic Growth in Transition Economies: Complementarity, Sequencing and Speed

Abstract: This paper considers the effects of sequencing and reform speed on output performance in transition countries. These largely unsettled issues are addressed using principal component techniques to construct reform clusters and by explicit tests of speed effects. The results indicate that broad-based reforms are good for output growth, but so is a policy of liberalisation and small-scale privatisation without structural reforms. Conversely, large-scale privatisation without adjoining reforms, market opening without supporting reforms and bank liberalisation without enterprise restructuring affect growth negatively. Swift reform policies allow transition countries to benefit from higher growth for longer time. The speed of reforms appears otherwise to have little effect on growth in the short and medium term.

Hub-and-Spoke or else? Free trade agreements in the 'enlarged' European Union

Abstract: The object of this paper is to estimate if and how the Central European Free Trade Agreement (CEFTA) and the Baltic Free Trade Agreement (BFTA) exerted a significant impact on intraEuropean trade, effectively reducing the influence of the European Association Agreements (EAs) in shaping the European trade structure has a hub-and-spoke system – with the EU15 being the hub and the CEECs the spoke. This paper analyses bilateral trade flows between eight CEECs and EU-23. We estimate a gravity equation using a system GMM dynamic panel data approach. Results support the assumptions that gravity forces and “persistence effects” matter. With respect to the effect of free trade agreements, evidence is found that Free trade agreements between CEECs matter: There is evidence that the presence of intra-periphery agreements helped expand intra-periphery trade and limited the emergence of a “hub-and-spoke” relationship between CEECs and EU. This results have important policy implications for the trade strategy of “future” EU members of the Southeastern European Countries as well as of the Southern Mediterranean Countries. According to the empirical results, these countries should move towards a regional free-trade area as exemplified by the CEFTA and the BFTA to avoid “hub-and-spoke” effects..

China in the International Fragmentation of Production: Evidence from the ICT Industry

Abstract: This paper investigates the position of China in the international fragmentation of production in the ICT industry, the most dynamic and globally dispersed sector in the world economy. The evidence shows that during the 1990s China dramatically increased its market shares in ICT products and now ranks among the top three world exporters. Moreover, China has upgraded from mere assembly of imported inputs to the manufacturing of high-tech intermediate goods. As a result, import dependence has declined and the domestic value added of exports has increased. This supports the hypothesis that industrial upgrading occurred in some tradable sectors through technological learning associated with processing trade. Therefore, a pattern of specialization initially dominated by processing trade could be favourable to a country's long-term development, to the extent that entering at the lower end of high-tech sectors is promotive of catching up in more sophisticated technology-intensive production. JEL Classification: F020, F14, L63, N60 Keywords: China, Fragmentation, Industrial Upgrading, Information and Communication Technologyx 1. Introduction Since the early 1980s, the integration of China into the world economy has been increasing dramatically: the country has expanded its foreign trade at a compound annual growth rate of 17.5 per cent. At the same time it has diversified its export structure: initially a producer of labour-intensive goods in traditional sectors, during the 1990s China upgraded to higher forms of processing than footwear and apparel industries that dominated in the 1980s and in the first part of the 1990s. By the late 1990s, not only had the skill level of exports increased, but the ratio of value added in export processing almost doubled from under 20 per cent in 1993-1994 to 35 per cent in the late 1990s (due to both higher wage levels required by more skilled labour and to the displacement of imports by locally produced parts and components) (Lardy, 2002). China's outstanding performance in world markets is mostly due to an increased involvement of the country in international fragmentation of production, i.e. the splitting up of the value chain into different stages carried out by firms in different countries. Indeed, China's foreign trade expansion in the 1990s relied mainly on processing operations: exports resulting from assembly and processing of imported parts and components made up 46 per cent of Chinese exports in 1992 and 55 per cent in 1996, and since then have represented more than half of Chinese exports (Lemoine and Unal-Kesenci, 2002). A great majority of this trade performance is due to an impressive increase of electronics trade: in 1985-98, China recorded the world highest annual average growth rate of electronics exports (52.8 per cent), almost four times higher than the average world rate (13.5 per cent)(Tung, 2003). A sectoral breakdown of the electronics sector shows that the ICT industry (i.e. Office machines, IT products, Telecom products and Semiconductors) accounted for the highest export and import shares if compared to other sub-sectors in electronics (43 per cent and 51 per cent respectively) (Tung, 2003). This expansion of processing activities in the ICT industry poses interesting questions. Which are the consequences on China's specialization profile over time? To what extent is China still mainly an assembly country, specialized in traditional labour-intensive sectors (textile, clothing and apparel) and in labour-intensive stages of production in otherwise advanced industries? And to what extent has it developed new production capacities in skill- and technology-intensive stages of production in sectors such as ICT? And, finally, how far has processing trade evolved from mere assembly of imported inputs to local production of intermediate skill- and technology- intensive products? To the extent that empirical evidence supports these questions, this would suggest that an industrial upgrading occurred in some tradable sectors of the Chinese economy through technological learning associated with processing trade. …

Russia: An Abnormal Country

Abstract: Andrei Shleifer and Daniel Treisman recently rendered a summary verdict on the post Soviet Russian transition experience finding that the Federation had become a normal country with the west's assistance, and predicting that it would liberalize and develop further like other successful nations of its type. This essay demonstrates that they are mistaken on the first count, and are likely to be wrong on the second too. It shows factually, and on the norms elaborated by Pareto, Arrow and Bergson that Russia is an abnormal political economy unlikely to democratize, westernize or embrace free enterprise any time soon. JEL Classification: P30, P40, P51, P52 Keywords: Russian economy, transition economics, comparative economic systems Master Pangloss taught the metaphysico theologo cosmologicology. He could prove to admiration that there is no effect without a cause, and that in this best of all possible worlds, the Baron's castle was the most magnificent of all castles, and my lady the best of all baronesses. It is demonstrable, said he, things cannot be otherwise than as they are, for as all things have been created for some end. They who assert that everything is right, do not express themselves correctly, they should say that everything is best (Voltaire, Candide, Chapter 1 How Candide Was Brought Up in a Magnificent Castle and How He Was Driven Thence, 1759. (Google, Online Literature Library). 1. Introduction Andrei Shleifer and Daniel Treisman (Shleifer and Treisman, 2004; Shleifer, 2005) contend that Russia has become a "normal country," (2) because thanks to the G-7's advice, Boris Yeltsin and Vladimir Putin have done most things right (Cf. Fischer and Sahay, 2004, Kuboniwa and Gavrilenkov, 1997; Cf. Ellman, 2004). (3) They define "normalcy" interchangeably as 1) a nation which has crossed the threshold from a cold war, centrally planned, authoritarian martial police state to virtuous democratic free enterprise, and 2) a middle income developing country with mixed characteristics that might mature into the western ideal. There is no reason to doubt that Russia can be classified as normal in the later sense, without implying a common destiny, even though much of the evidence Shleifer and Treisman adduce is misleading, because the criterion is elastic, requiring little more than Russia's partial abandonment of authoritarian rhetoric, planning and state ownership. But the contention that consumer demand governs household supply under the rule of law, and people's preferences determine public choice is wrong, as are the assertions that the Kremlin eschews authoritarianism at home and domination in the "near abroad." Nor is it likely that Russia is favorably positioned to be as efficient and just as the developed west in the foreseeable future. 2. Muscovite abnormality The abnormality of Russia's private sector economy is easily established by comparing its traits with those of developed western market systems, without begging the question by assuming that the flaws exhibited by developing systems are self-remedying. The litmus tests are the characteristics of ownership, property rights, rule of contract law, price determination, market entry, profit maximizing, utility maximizing, efficient equilibration, and state regulation responsive to popular will. The existence of markets is a necessary, but not a sufficient condition for western economic normalcy (Gaddy and Ickes, 2002). Ownership in Russia fails this test. The land and most resources, as well as a large portion of the capital stock still remain in the hands of the state, (4) and workers own a large share of the voting capital of industrial enterprises. (5) Proprietary rights of ownership and control over non-state assets remain tenuous, as demonstrated by the expropriation and de facto re-nationalization of Yukos. (6) Alienable proprietorships, especially lucrative ones operate more as rent-seeking than competitive profit maximizing entities. …

The Evolution of Competition in Banking in a Transition Economy: An Application of the Panzar-Rosse Model to Armenia

Abstract: The structure of the banking industry typically undergoes fundamental changes during the transition to a market economy This research employs the method suggested by Panzar and Rosse (1987) to evaluate the empirical evidence on the evolution of competitive structure in the Armenian banking industry during its recent transition and on the possible forces--market power or efficiency/contestability--that underlie that evolution The results point to monopolistic competition The reduction of bank numbers and the simultaneous increase in concentration is accompanied by a decline in competition intensity, which supports the market-power hypothesis JEL Classification: L1, L8 Keywords: bank competition; bank markets; Panzar-Rosse model, transitional economy 1 Introduction The Armenian banking system has experienced fundamental changes in recent years as it is making the transition to a market economy The very liberal regulatory approach during 1990-1993 resulted in the proliferation of risky short lived banks and, ultimately, a large number of deceived depositors The more recent strict regulatory approach to Armenian banking, implemented since 1993, seeks to strengthen the banking system and improve its soundness which in practice has meant the elimination of about half of the pre-existing banks At the initial stage of the reforms, the Armenian banking system comprised only small local banks and a few big former Soviet banks These were too weak to support the development of industry and commerce on the scale necessary for rapid development Hence, new rules of the game were adopted aimed at modernizing the banking sector The new framework has permitted the trend toward internationalization to continue and has thus led to a greater involvement of foreign banks in the Armenian banking system This, in turn, has intensified the competitive pressure on the local Armenian banks It is for this reason that the Central Bank of Armenia (CBA) has adopted a policy of strengthening local banks by means of forced capitalization, ie, increasing minimum capital requirements, and consolidation In this light, two questions naturally arise The first asks what sort of industrial structure the Armenian banking system is evolving toward The second asks what kind of regulatory policy should be adopted in light of this evolutionary process This paper reviews the structure of the Armenian banking industry using data from the years 1998-2002 and employing the tests developed by Panzar and Rosse (1987) (PR below; See also Gelos and Roldos, 2002 Subsequently, the issues of competition and concentration are linked to test the validity of either the market-power or efficiency/contestability hypothesis in Armenian banking To preview the results briefly, we find that the Armenian banking system can be characterized as monopolistically competitive I show that the reduction in the number of banks and the associated increase in concentration during 1998-2002 was accompanied by a decline in the intensity of competition, thus supporting the market power hypothesis This result contrasts with that of other emerging countries where consolidation has, largely, not yet been translated into a decline in competitive pressures However, the Armenian experience is more consistent with those of European countries where consolidation is accompanied with decline in the fierceness of competition The policy implication is that the "infancy" period is over and that bank regulatory officials should be wary of permitting the process of consolidation and increasing concentration to proceed much further Section 2 provides a literature overview In section 3, we offer an overview of structural changes in the Armenian banking system during 1995-2003 In section 4, we describe the data and estimation procedures Section 5 then presents the main results Concluding remarks follow in Section 6 …

Inflation targeting, between rhetoric and reality: The case of transition economies

Abstract: 1. Introduction In recent years a number of central banks have adopted IT as a monetary policy regime. There is now a large literature that deals with IT; see among others, Bernanke et al. (1999), Taylor (1999), Truman (2003). The move towards IT started in the 1980's, after the period of high inflation caused by the oil shocks. The inflation adversity that prevailed during that period made monetary institutions to voice their strong commitment to fighting inflation. Recent developments in economic theory strengthened the case for switching towards IT. The basic macroeconomic framework of the New Neoclassical Synthesis (Goodfriend and King, 1997) has provided a theoretical foundation for models employed in monetary policy analysis. These models seem to suggest that a central bank (CB) should pursue an activist policy to target inflation. It has to be said however, that it is too early to judge how well the IT framework is working. The rationale for IT is essentially a long-term one and the inflation targeters' experience is too limited yet in order to provide a definite assessment of its success or failure. In a comprehensive study, Mishkin and Schmidt-Hebbel (2001) argue that inflation targeting proved to be in general a successful policy. The authors claim that IT reinforced accountability, credibility, resilience to external shocks and helped high inflation countries to reduce inflation to normal levels (most of them were emerging economies). Yet they point that, at the end of the process, inflation in IT countries is not lower than in non-IT countries. Along the same lines Ball and Sheridan (2004) show that, once corrected for the initial conditions, the differences between inflation targeters and non-targeters are minor. Fraga, Goldfajn and Minella (2003) also argue that average inflation in both emerging and developed economies fell after the adoption of IT. Other authors such as Friedman (2004) contend that IT, as practiced in reality in the low inflation countries, actually obscures the communication of the central bank's goals. Moreover, Friedman (2004) argues that this monetary policy framework is not as transparent as claimed by most IT advocates, casting doubts on the benefits brought about by the adoption of IT. A recent analysis made by the IMF (2) concludes that IT appears to have generated a lower inflation environment in countries that decided to adopt this monetary policy framework. However, it is not clear to what extent the increase in globalisation and a better understanding of how monetary policy works in developed economies helped in the creation of such an environment. Moreover, the analysis makes inferences on the group of IT countries from emerging markets as a whole without distinguishing the subgroup of transition economies. Such a distinction would be useful given that transition economies face special circumstances--expectations in these countries are driven by EU accession and Maastricht criteria impose additional constraints on the implementation of monetary policy. This paper examines the inflation targeting regime in the context of transition economies. The success of such a regime depends largely on the degree to which certain general requirements are met. As experience in a number of transition economies has shown so far, targeting inflation is not an easy task. The ongoing restructuring process in these economies makes the inflation forecasting process more difficult and introduces an additional source of uncertainty into the system. Moreover, additional constraints imposed either by the Maastricht criteria or the requirement to join the ERM II prior to the euro adoption complicate matters further. By unequivocally choosing inflation as a nominal anchor the central banks could face potential dilemmas if, for example, the exchange rate appreciated too much following capital inflows. The idea of the paper is to present the broad framework in which inflation targeting could operate efficiently and provide an assessment of the extent to which such a regime, when applied to transition economies, could fit into this framework. …

Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?

Abstract: This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector's productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern Europe. JEL Classification: E31, O11, P17 Keywords: Balassa-Samuelson effect, productivity, inflation, real exchange rate, transition, South Eastern Europe, CIS, Turkey (ProQuest Information and Learning: ... denotes formulae omitted.) 1. Introduction The prospect of joining the EU and the actual accession of eight countries from Central and Eastern Europe to the European Union in May 2004 have triggered a lot of research related to the Balassa-Samuelson (B-S) effect. A first round of studies, mainly from the late 1990s and early 2000s, suggested that one of the major determinants of high inflation observed at that time in the CEECs was the Balassa-Samuelson effect. Sinn and Reutter (2001) came up with figures up to 6.7% inflation a year due to the B-S effect, and Golinelli and Orsi (2002) and Rosati (2002) followed suit, reporting numbers of the same order of magnitude. The straightforward policy consequence of these results was, as forcefully argued in Buiter and Grafe (2002) and Szapary (2003), that countries then at the door of the EU were expected to be unable to fulfil the Maastricht criterion on inflation and exchange rate stability because of high structural inflation fuelled by rapid economic catching-up. A second wave of studies watered down these results considerably and pointed out that the B-S effect may not be all that important for the new EU member states after all.2 For instance, Kovacs (2002), Flek et al. (2002), Burgess et al. (2003), Egert et al. (2003) and Mihaljek and Klau (2004) estimated the inflation differential towards the EU-15 to vary, on average, from 0% to 1% a year, with 2% being the highest figure. Having said this, however, there are very few papers, which analyze the importance of the B-S effect for countries other than the eight new EU member states of Central and Eastern Europe. As a matter of fact, countries involved in future enlargement of the EU and the CIS are badly neglected in the literature in that no country-specific investigation was carried out for them. Most of the time, these countries are included in a panel and very general conclusions are advanced for the panel as a whole3. An exception is Nenovsky and Dimitrova (2002) who looked at the case of Bulgaria, but used a brief time span of only five years or so, and Egert et al. (2003) and Dubravko and Klau (2004) who analyze Croatia. This motivates us to take a closer look at this group of countries. More specifically, we analyze the case of two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey4) and two CIS countries (Russia and Ukraine). These are indeed the countries for which data are readily available, on the basis of which not only a narrative analysis but also an econometric investigation can be carried out. …

The Measurement of Co-Circulation of Currencies and Dollarization in the Republic of Armenia

Abstract: This paper attempts to estimate the actual (de facto) level of dollarization in Armenia. "Co-circulation" involves the regular use of two or more currencies within an economy. The existence of an unknown amount of foreign currency in circulation makes the outcome of domestic monetary policy uncertain. The volume of foreign currency deposits is easily obtained from the official statistics. However, it is very hard to determine the stock of foreign currency in circulation. The effective money supply may be much larger than the domestic money supply and is subject to behavioral responses which are very different than the movements of the presently measured money supply. The purpose of this paper is to assess the level of dollarization, that is, to evaluate the size and/or proportion of foreign currency in the total money stock of Armenia as a highly dollarized country. JEL Classification: E4, E5, F3, G21, P2, P3 Keywords: dollarization, currency substitution, asset substitution, foreign currency, transition economies. Armenia (ProQuest Information and Learning: ... denotes formula omitted.) 1. Introduction After most restrictions on foreign currency holdings were relaxed in the early 90s, foreign currency notes and deposits in Armenia have been increasing rapidly. At present, foreign currency (principally the U.S. dollar) is widely used in the Republic of Armenia as a medium of exchange and as a means of saving in preference to the domestic currency. Residents hold about three quarters of their total deposits in foreign currency. These deposits constitute about half of broad money. Foreign currency in circulation and deposits, therefore, must be regarded as part of the country's money stock. Dollarization is an important issue in many developing and transition economies. Currency substitution in developing and Eastern European countries is usually one of the consequences of high and variable inflation. High inflation, in turn, leads to dollarization and eventually to currency substitution. However, high inflation is not the only cause of dollarization. The issue of currency substitution gained high importance in Eastern European and Former Soviet Union (FSU) countries since the early 90s when the command economy broke down and the newly established market economies became open to the outside world. High inflation and economic instability were present in Armenia in the early years of transition. The volume of foreign currency stock, especially U.S. dollars, increased rapidly under these conditions and became a major part of Armenia's money stock. Monetary stabilization in the late 90s did not substantially reduce the level of dollarization as measured by deposits. Thus the causes why businesses and households prefer to maintain their monetary holdings in foreign currency cannot be explained only by inflation. Other factors, such as the openness of the economy, economic uncertainty, lack of confidence in the domestic currency, play an important role in the high level of dollarization. It appears that unofficial dollarization reflects citizens' perceptions of the stability of the domestic monetary regme, the credibility of monetary policies and the perceived stability of the domestic banking system. Thus dollarization is viewed as a long-term phenomenon in the Armenian economy and its measurement is essential for the country's monetary policy and for increasing the quality of the national statistics. Co-circulating foreign currency holdings reflect both currency substitution and asset substitution. The two may have different economic consequences, making the implications of unofficial dollarization for macroeconomic decisions more difficult to predict. The greater the extent and variability of dollarization, the weaker is the central bank's knowledge of and control over the effective money supply. Growing unofficial dollarization reduces the ability of the monetary authority to earn seigniorage from its own currency issue. …

Pay Inequality in Europe 1995-2000: Convergence Between Countries and Stability Inside

Abstract: This paper measures pay inequality in the EU during the convergence process to the Monetary Union. The decomposability property of Theil’s T statistic permits us to construct a three-level hierarchical panel data set of pay inequalities for the years 1995-2000: between and within regions, countries, and for the European continent as a whole. We find a marked pattern of declining pay inequality across Europe for this period, which is due mainly to the rising (initially, negative) position of the United Kingdom and decreasing positive position of Germany.

Concentration in Knowledge Output: A Case of Economics Journals

Abstract: This paper assesses the degree of author concentration in seven economics journals, which were published in India during 1990-2002. To measure the degree of author concentration, Lotka's Law was used. Moreover, we also make an exploratory analysis of the geographic, economics subfield and institutional concentration in 704 economics journals. An important finding of this paper is that specialized journals in the sample report the highest degree of author concentration. This result is quite similar to the findings by Cox and Chung (1991). Furthermore, there are several instances showing that the journals lean towards certain norms; this may affect the flow of innovative ideas into economics. We conclude that a knowledge activity, involving the high degree of concentration and a biased publication process, may affect the flow of new ideas into the discipline. JEL Classification: A14, B50, B52 Keywords: Concentration, Lotka's Law 1. Introduction This paper examines the degree of concentration that exists in the distribution of knowledge output among individuals. The analysis is based on seven economics journals, which were published in India during 1990-2002. It also gives an analysis of macro units of concentration such as geography, area and institution; for this purpose it covers 704 economics journals. Further, we discuss some aspects of the publication process, and explore how it affects the discipline. The analytic approach in this paper is of a mixed type. Lotka's Law, following Cox and Chung (1991), is applied to the author data, while simple measures like the Herfindahl-Hirschman Index (HHI) and the share of top three institutions are used as the measures for the other units of concentration. Journals, in any academic discipline, play a crucial role by facilitating the exchange of knowledge, and thereby contributing to the overall expansion of knowledge. An article, published in a journal, is often referred to as an item of knowledge output (Lovell, 1973); it provides a variety of benefits to its author. Naturally, a typical researcher will try to publish her papers in reputed journals. It is quite likely that there is an excess demand for such opportunities. The degree of scarcity is more severe in the prestigious journals. Unlike simple market clearing, the exchange between authors and a journal is more complex. In such an exchange, norms play a significant role. Each journal has its own norms. However, a few norms such as the degree of formalism are common across economics journals. (1) Moreover, the decisions by a journal's editors and referees are often sensitive to such norms. The norms, which the journals adopt, have specific cultural contexts. In many instances, the norms evolve in the universities and schools of thought, and later the journals adopt them. Reflecting on this cue, we can say that such institutions have a role in the publication process. An author has to comply with the norms for getting her article published while many lack the skills to fulfill them. The institutions often act as the conduits through which the authors get acquaintance with these norms. (2) Such norms often constrain the chances of an author, who is less familiar with the skills specific to these norms, from publishing her article. It is quite likely that the authors from the institutions, which have expertise in such skills, tend to have more publications. The contents of this paper are as follows: Section 2 deals with the concentration in knowledge output. Section 3 covers the analysis of different concentration indicators. Section 4 discusses the issues related to the publication process. Section 5 concludes the paper. 2. Concentration in Knowledge Output The knowledge output in economics has shown significant growth in recent times. One fourth of Social Science publications are in economics; it gets one third of the citations in Social Science (Ingwersen et al. …

Core inflation in a small transition country: choice of optimal measures

Abstract: Several non-monetary (mainly supply) factors affect prices in the short-run. It is widely acknowledged that in countries (especially countries in transition), where the price level is highly volatile and seasonal, it is not expedient for central banks to use official inflation index while formulating monetary policy. For this reason, it is crucial for central banks to work out, study and follow the behavior of core inflation that enables to reflect long-run price movements. This paper presents the application of various methods of calculating core inflation to Armenian data (for 1996:1-2002:12). Each measure is calculated at monthly frequencies and evaluated by different criteria. The analysis shows that core inflation indices, calculated by trimming the distribution of prices at 10 or 15%, are the best and most effective indicators for monetary policy-makers in Armenia, since they capture inflation trends and are closely tied to monetary aggregates. However, the median seems to be the best predictor for forecasting inflation of all core inflation measures discussed in this paper. JEL Classification: P2, P3, E31, R5 Keywords: inflation, transition country, Armenia (ProQuest Information and Learning: ... denotes formulae omitted.) 1. Introduction Ever since the middle of the last century, the central banks started to play a key role in the process of the aggregate demand management. In that context, they tried to manage economic growth, unemployment, wages etc. Only after the breakdown of the Bretton-Woods monetary system the central banks' key role was realized mainly through the maintenance of the price stability. In line with the development of financial and capital markets the concept of the price stability was also developed and the idea of direct inflation targeting became widespread. This is because the maintenance of price stability creates conditions for households and businesses to formulate healthy expectations on price movements and make right decisions on consumption and investments. Since 1996 the law "On the Central Bank of the Republic of Armenia" made the maintenance of price stability the main goal of the Central Bank of the Republic of Armenia (CBA). In the annual monetary policy program CBA announces the appropriate annual rate of inflation, and describes the main policy measures needed for keeping the inflation within the determined level. However, these developments brought many difficulties and raised peculiarities that central banks need to explain when they accept inflation targeting as a monetary strategy. The latter refers to such issues as which price indices to choose, how to define them, how to communicate with the public regarding the chosen goal and how to explain deviations from it without confusing it. Inflation targets were orignally expressed in terms of the rate of change or the level of the consumer price index. The consumer price index (CPI) is a weighted average index, representing movements of overall price level, i.e., cost of consumer basket of goods and services, which is measured by the National Statistical Service of the Republic of Armenia (NSS). CPI is highly volatile, due to the seasonality of the production of some goods and services such as agricultural products, and tourism, and to annual cycles of consumer expenditures. The CPI can be treated as a least variance estimator of economy-wide price changes only if the price change distribution is normal (see, e.g. Rae, 1993, Ball and Mankiw, 1995, Jaramillo, 1997). If the target of monetary authorities is to maintain price stability in the economy, they ought to be able to distinguish between temporary shocks to the price level and a persistent drift of prices. Different shocks like seasonality, crop failures or other short-term fluctuations are beyond the control of monetary authorities. Therefore, central banks should disregard various one-off shocks coming from the supply side and govern or control long-term movements in prices that reflect aggregate demand. …

European Economic Policies at Work: The Costs of Price Stability and Budget Consolidation

Abstract: The paper investigates whether the policy framework adopted by the EMU participating countries might create recessive tendencies. First we check the existence of a deflationary bias by separately analysing monetary and fiscal policy. The analysis of monetary policy focuses on a backward- and a forward-looking monetary rule. The reaction functions are estimated to capture the criteria that a centralized monetary authority should use in setting short-term interest rate. Second, a comparative analysis is made of the ability of different central banks to stabilize output and inflation. Precisely, we compare the strategy followed by the European Central Bank, the Deutsche Bundesbank and the US Federal Reserve. Then, a measure of fiscal bias is retrieved by estimating the impact that a change in the primary surplus to GDP ratio has on the real economy. Finally, we search for a quantitative assessment of the recessive propensity of the European economic policies by estimating an overall policy bias. The results suggest the EU institutional set-up might create and/or amplify the recessive tendencies. The policy constraints the EMU members face were dreamt when the Community was struggling with an inflationary legacy. The danger nowadays is not inflation but rather its opposite, deflation. As a consequence, the EU institutions need to be at least partially reformed. JEL Classification: C52, E52 Keywords: Monetary and Fiscal Strategy, ECB, EMU 1. Introduction This paper deals with the characteristics of the economic policies pursued in European Monetary Union (henceforth EMU and with their theoretical fundamentals. The main interpretative hypothesis underlying the study is that a deflationary bias is embodied in the way the policy authorities act within the European framework. This recessive propensity depends on the overall criteria concerning the institutional commitments on the conduct of both monetary and fiscal policies. More specifically, the commitment of price stability for the European Central Bank (ECB) together with the commitment of financial stability for the member state governments aims at achieving the minimum inflation rate without any matter to employment and production levels. We could define the European deflationary bias as a policy that, in conditions of neutrality, transmits recessive impulses to the economy. The approach of overall European economic policies is founded on specific theoretical hypothesis that can be easily retraced in the ECB and European Commission documents. A clear distinction between the policy makers and the politicians, that are supposed to suffer of "inflationary bias"; the central role of monetary stability; the neutrality of monetary policy and hence the ineffectiveness of aggregate demand based policies; the destabilizing effects of high public deficit and debt according to the validity of "equivalence theorem". We form the hypothesis that the deflationary bias is a legacy of the Maastricht Treaty, i.e. of the strong commitment to fiscal and monetary policies of candidates' countries. Hence, using a database that covers a period preceding the launch of euro, we try to check the potential deflationary bias of current policies. The remainder of the paper proceeds as follows. Section 2 introduces the structural model used in the empirical analysis and presents the econometric methodology applied in order to evaluate the existence of a monetary policy deflationary bias. In particular, a backward- and a forward-looking monetary rule are estimated to capture the criteria used by European Central Bank to fix short term interest rate. An efficiency frontier analysis and a comparison of the results with the behaviour of Deutsche Bundesbank and Federal Reserve are also provided. In Section 3, a measure of fiscal bias is obtained by estimating the impact of primary surplus on European output gap. Section 4 concerns a quantitative evaluation of the recessive propensity of both monetary and fiscal policies. …

How Tight Is Too Tight? A Look at Welfare Implications of Distortionary Policies in Uzbekistan

Abstract: 1. Introduction Uzbekistan is strategically located in Central Asia, at the crossroads of the ancient Silk Road between China and Europe. Of the 15 independent states that emerged from the breakup of the Soviet Union in 1991, Uzbekistan is the third largest in population (about 26 million) and the fourth largest in land area (448 thousand square kilometers). During the Soviet period, Uzbekistan was developed as a leading center for cotton production, capitalizing on its vast water resources for irrigation. Since independence, the Uzbek authorities have opted for a gradual approach to reforming their economy. Their strategy aimed at building a socially oriented market economy, and developing industrial and manufacturing capacity in a predominantly agricultural economy using substantial and direct central guidance. To that end, the government has adopted an import-substitution strategy, particularly since 1997, that has relied heavily on administrative intervention and a restrictive foreign exchange and trade regime. Unfortunately, this gradual reform strategy relied heavily on three interventionist pillars, most of which have their roots in Soviet planned-economic practices: exchange and trade controls, directed resource allocation, output targets (especially agricultural) and sizable public investment. Some of these controls and restrictions, discussed in detail in the paper, are quite unique. As a result, while these policies may have prevented output from contracting in the early 1990s, they led to disappointing economic and social conditions later on. (2) Industrial growth was very low and uneven. While some new industries were promoted, many others have ceased operations or are operating below capacity. Production and exports witnessed little diversification. The government's presence remains strong in many areas, with governance and capacity issues providing reasons for concern to the international community. (3) Furthermore, the opacity and unpredictability of government policies continue to hinder domestic economic activity (IFC, 2004) and foreign investment. Uzbekistan lags behind most transition economies in terms of market development, large-scale privatization, and corporate governance. Zettelmeyer (1998) found that Uzbekistan's good output performance during the early 1990s was mainly due to a combination of low initial industrialization, (scale of) cotton production, and self-sufficiency in energy. These three elements more than offset the impact of the government's poor macroeconomic and structural policies. This conclusion that the government's public investment and gradualist reform program were not the driving forces behind the relatively favorable output performance is also repeated in Taube and Zettelmeyer (1998). The government's interventionist and distortionary policies were also reflected in the financial sector--dominated by state-owned banks--and in monetary and exchange rate policies. The legacy of administratively-determined interest and exchange rates and limits to access to cash resulted in deteriorating confidence in the financial system. This is reflected in the low level of monetization and heavy reliance of the banking sector on foreign loans as a liability base. (4) Ranaweeva (2003) shows that the disequilibria in the product and money markets--in an environment of multiple exchange rates, administrative controls, and import restrictions--were the major forces driving inflation dynamics in Uzbekistan. In turn, Rosenberg and de Zeeuw (2000) found that Uzbekistan's multiple exchange rate regime transferred about 16 percent of GDP from exporters to importers and generated identifiable welfare losses in the range of 2-8 percent of GDP on import markets and up to 15 percent on export markets. However, the government has addressed some of these problems since 2000. It has successively reduced exchange market distortions and introduced currency convertibility, tightened fiscal and monetary policies, initiated the restructuring of farms into leaseholds, and followed a more conservative borrowing path. …