European Review of Economics and Finance
Aims and Scope
Carlos Pestana Barros
Victor Fernandez Blanco
Editorial Advisory Board
EREF - Contents
Instructions to authors
Instituto Superior de Economia e Gestão
Universidade Técnica de Lisboa

EREF - Volume 3 - nº 3

Vol. 3, n.º 3 - July 2004

Philip Molyneux

Philip Arestis and Malcolm Sawyer

Can monetary policy affect
the real economy?

Svitlana Maslova
The Choice of Exchange Rate Regimes
in Transition Economies

Ulrike Neyer
Banks' Behaviour in the Interbank Market
and the Operational Framework
of the Eurosystem

Cândida Ferreira
Portuguese Banks and the Credit Channel Transmission of Monetary Policy

Valeriya Dinger and Jürgen von Hagen
Risk Effects of Bank Specialization in Central and Eastern European Countries

Daniel Stavárek
Banking Efficiency in Visegrad Countries Before Joining the European Union

Ulrich Thießen
Financial System Development, Regulation and Economic Growth: Evidence from Russia

Angel Liao and Jonathan Williams
Volatility transmission and changes in stock market interdependence in the European Community

Article:    Can monetary policy affect the real economy?
  Philip Arestis a, b and Malcolm Sawyer b, c
a University of Cambridge
b Levy Economics Institute
c University of Leeds
Current monetary policy involves the manipulation of the Central Bank interest rate (the repo rate), with the specific objective of achieving the goal(s) of monetary policy. The latter is normally the inflation rate, although in a number of instances this may include the level of economic activity (the U.S. Federal Reserve monetary policy is a good example of this category). This raises two issues. The first is the theoretical underpinnings of this mode of monetary policy. The second is the channels of monetary policy or, more concretely, the channels through which changes in the rate of interest may affect the ultimate goal(s) of policy. Both aspects are investigated in this paper. Furthermore, we suggest that it is imperative to consider the empirical estimates of the effects of monetary policy. We summarise results drawn from the eurozone, the U.S. and the U.K. and suggest that these empirical results point to a relatively weak effect of interest rate changes on inflation. We also suggest, on the basis of the evidence adduced in the paper, that monetary policy can have long-run effects on real magnitudes. This particular result does not fit comfortably with the theoretical basis of current thinking on monetary policy.

Key words: Monetary policy, 'new consensus', channels of monetary policy.

JEL Classification Numbers: E5, E52.

Article:    The Choice of Exchange Rate Regimes
  in Transition Economies
  Svitlana Maslova a
a Faculty of Economics and Politics - University of Cambridge - Cambridge - United Kingdom.
This paper presents study of the monetary policies in 25 CEE and CIS transition economies for the period from 1990 to 2001. The importance of monetary policy in this group of countries is driven by the problems with combating inflation and increasing real output. The choice of nominal anchor, the choice of exchange rate regime and capital controls in these transition economies is discussed. The ordered logit model is used to define the factors which have influence on the choice of exchange rate regime and the applicability of optimal currency areas' theory to the transition economies. It confirms theoretical results, although the results of estimation are different for announced and actually implemented exchange rate regimes.

Key words: Exchange rate, transition economies, ordered logit model.

JEL Classification: C23, C25, F41.

Article:    Banks' Behaviour in the Interbank Market
  and the Operational Framework of the Eurosystem
  Ulrike Neyer a *
a Martin-Luther-University Halle-Wittenberg, Department of Economics, 06099 Halle/Saale, Germany, Tel.: +49/345/552 33 33.
In March 2004, the Eurosystem has changed its operational framework. The maturity of the main refinancing operations has been reduced and the timing of the minimum reserve maintenance period has been changed. This paper provides a theoretical foundation for these alterations. It shows that under the old framework the following problems occur: under- and overbidding in the main refinancing operations, extremely uneven provisions of required reserves and a violation of the Eurosystem's principle of equal treatment. We show that these problems can be avoided under a modified framework capturing main elements of the Eurosystem's new framework.

Key words: Interbank Market, European Central Bank, Monetary Policy Instruments, Bank Behaviour.

JEL Classification: E52, E58, G21

Article:    Portuguese Banks and the Credit Channel Transmission
  of Monetary Policy
  Cândida Ferreira a
a Instituto Superior de Economia e Gestão - Universidade Técnica de Lisboa - Rua Miguel Lupi, nº 20, 1249-078 - LISBOA, PORTUGAL
Tel.: +351 21 392 58 00 Fax: +351 21 397 41 53.
This paper makes a contribution to the analysis of the credit channel transmission mechanism of monetary policy in Portugal during the last decade by considering the role of three bank performance indicators - asset structure, general credit capacity and financial margins. Using panel data analysis we conclude that there is evidence of a bank lending channel and that its incidence is affected by bank performance indicators, both directly and indirectly, through real GDP growth, the inflation rate and monetary policy interest rates. Generally speaking, asset structure had a positive influence on lending during this period while credit capacity and financial margins did not follow the growth in bank lending.

Key words: Bank lending; monetary policy transmission; panel estimates; Portuguese economy.

JEL Classification: E4, G2

Article:    Risk Effects of Bank Specialization
  in Central and Eastern European Countries
  Valeriya Dinger a and Jürgen von Hagen b
a Center for European Integration Studies, University of Bonn.
b Center for European Integration Studies, University of Bonn and CEPR.
Correspondence: Center for European Integration Studies, University of Bonn, Walter-Flex-Str. 3, 53113 Bonn, Germany.
The banking sectors in several Central and Eastern European countries are characterized by a two-tier structure, in which a few large banks dominate the deposit market but are very inactive in the loan market with private borrowers, while many small banks engage in lending but have only small shares of the deposit market. The large banks act as net lenders in the interbank market, while small banks are net borrowers in the market. Typically, the former banks are incumbent institutions from pre-transition times, while the later are new institutions.

In this paper, we discuss whether this two-tier structure and the resulting interbank transfer of funds have any important risk-alleviating effects on the performance of the banking sector. Specifically, we consider the effects on the lending activities of the small banks. As large banks have monitoring costs benefits compared to retail depositors regarding the lending activities of the other banks, the two-tier structure should induce small banks to engage in less risky lending activities than small banks that finance themselves predominantly in the deposit market.

We test this and related hypotheses using balance sheet data from banks in 10 EU accession candidate countries. This allows us to compare the financial activities of small banks in countries where a two-tier structure prevails with those of small banks in markets where such a pattern is not observed. The results generally confirm the hypothesis of risk-alleviating effects of banks specialization.

Key words: Bank specialization, interbank borrowing, interbank monitoring, risk undertaking, transition countries.

JEL Classification: G21, E53

Article:    Banking Efficiency in Visegrad Countries
  Before Joining the European Union *
  Daniel Stavárek a
a Assistant Professor - Silesian University in Opava - School of Business Administration in Karviná Department of Finance - Univerzitní nám. 1934/3 - 733 40 Karviná - Czech Republic.
Tel.: +420 596 398 309 - Fax: +420 596 312 069
This paper is the first attempt to estimate commercial banks' efficiency in the Visegrad region before joining the EU and also to consider differences in efficiency across the countries. Employing Data Envelopment Analysis, we analyze which of the banking sectors is the most efficient and whether there has been an improvement in banking intermediation efficiency since 1999. Incorporating censored Tobit regression analysis we try to detect whether the cross-country differences should be explained by country specific environmental factors or internal variables such as profitability, size or foreign ownership. Overall, the results suggest that since 1999 there has been, with the exception of Hungary, no improvement in efficiency, and its actual level reaches preferably moderate levels. Efficiency differences among Visegrad banking industries seem to be in the first place determined by country specific factors.

Key words: Banking efficiency; Visegrad countries; Data Envelopment Analysis; Tobit model; banking intermediation.

JEL Classification: C14, C34, G21

* The paper was prepared due to support of the Silesian University Internal Granting System. (Project no. 24/2003).

Article:    Financial System Development, Regulation
  and Economic Growth: Evidence from Russia
  Ulrich Thießen a
a German Institute for Economic Research.
Recent contributions to the empirical analysis of the relationship between financial system development and economic growth found that an exogenous component of financial system development causes economic growth is a good predictor of growth and that its growth impact is relatively large. In addition, the empirical literature on banking crises predicts that their adverse effects on economic growth will rise in the absence of an adequate response by the government. Given these findings and considering that the Russian government failed to respond adequately to the 1998 banking crisis, Russia's strong economic growth since the crisis is a puzzle. The paper attempts to analyze Russia's growth process and to empirically make visible the impact of the banking crisis. It is found that the growth costs of the crisis may have been even larger than suggested by a simulation that uses growth coefficients from the literature. This adverse growth impact was compensated by other expansionary effects. The finding corroborates those studies that argue for the importance of financial system development in promoting growth in transition countries.

Key words: Financial system stability, economic growth, banking crisis.

JEL Classification: C53 ; G28; O16; O40

* The author is grateful for critical comments by Professors Cândida Ferreira and Paul Gregory and to participants of a workshop on "European Integration and Banking Efficiency" at the Technical University of Lisbon October 2003.

Article:    Volatility transmission and changes in stock market
  interdependence in the European Community
  Angel Liao a and Jonathan Williams a
a Centre for Banking and Finance, School for Business and Regional Development, University of Wales, Bangor; UK, LL57 2DG.
A multivariate BEKK GARCH representation is employed to model stock market interdependence in groups of EC stock markets between 1987 and 2003. Using daily data, we estimate the effect that news or information spillovers from one market has on the next day returns in other markets. We quantify the sources of volatility transmission as price changes and noise. Our models allow interdependencies to vary over time allowing us to investigate whether interdependence changes following the introduction of the single currency. Generally, stock market integration increases after 1999 although there are differences in the levels of interdependence between (and within) northern and southern European markets. Information spillovers are tend to be transmitted more through noise than price changes though volatility transmission between Germany, Europe's leading economic power, and the UK, Europe's leading financial power, is through price changes after 1999. The results support the view that financial deregulation leads to financial market integration implying that further deregulatory acts can be expected to realise positive outcomes. The major European markets are increasingly integrated with the international (US) market. We observe the main transmission mechanism between Germany and the US is noise whereas it is price changes between the UK and US. Whereas US information influences UK returns more than UK information affects US returns, innovations in Germany are at least as important as US news is on next day German returns. Our conjecture is that the information content of European markets is not homogeneous to international markets.

Key words: Stock markets, integration, interdependence, volatility transmission, spillover, GARCH, BEKK representation, EC.

JEL Classification: C32, G15, F36

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