Focus on Transition

Editorial 
Recent Economic Developments
Developments in Selected Countries 
Stephan Barisitz, Jarko Fidrmuc, Pawel Kowalewski, Wolfgang Maschek,
Thomas Reininger, Franz Schardax

Studies

Catching Up: The Role of Demand, Supply and Regulated Price Effects on the Real Exchange Rates of Four Accession Countries 
Ronald MacDonald and Cezary Wojcik
The main aim of this paper is to examine the exchange rate behavior of a group of four transitional EU accession countries, with a view to making policy recommendations regarding their accession to full European Monetary Union. We employ a dynamic OLS panel estimator to investigate the relative importance of demand and supply influences on the exchange rates of these countries. Our analysis shows that both supply- and demand-side effects are important for the accession countries, although their overall effect on inflation differentials and competitiveness seems to be small. An additional focus of the paper is the examination of the role that administrated, or regulated, prices and the productivity of the distribution sector play in the real exchange rate dynamics. Based on a unique data base, we show that administered prices have been a powerful force behind price and real exchange developments for our group of accession countries. The distribution sector is shown to have an independent effect on the internal price ratio over and above that generated by the Balassa-Samuelson effect.

Exchange Rates and Long-Term Interest Rates in Central Europe: How Do Monetary and Fiscal Policy Affect Them? 
Franz Schardax
This paper examines the impact of monetary and fiscal policy on exchange rates and interest rate spreads in three Central European accession countries (the Czech Republic, Hungary and Poland). In the main section of the paper country-specific unrestricted VAR models are estimated and used to examine the impact of state budget balances and money market interest rate differences between the three Central European countries and a reference country/currency basket on exchange rates (gross official reserves for the exchange rate peg case) and yield differences for five-year bonds. For the Czech Republic and Poland the most recent monthly data since the introduction of the direct inflation targeting/floating rate regime were used. The Hungarian estimates are based on the May 1997 to April 2001 interval from the crawling peg/narrow band era. While bond spreads do not appear to be affected by budget balances in all three cases, for the Czech Republic there is some evidence of an indirect effect on the exchange rate. Except in Poland monetary policy is able to exert an influence on the longer sections of the yield curve, but there is no statistically significant link between short-term interest differences and the exchange rate. As a result, the exchange rate channel of the monetary transmission mechanism becomes highly unpredictable. 

Twin Deficits: Implications of Current Account and Fiscal Imbalances for the Accession Countries 
Jarko Fidrmuc
This contribution analyzes the relationship between the current account and the fiscal balance. The study finds significant hysteresis (unit root) of the current account and fiscal balance for the majority of industrial countries as well as selected emerging and transition economies between 1970 and 2001. Twin deficits are defined as a positive long-run relationship between the current account and the fiscal balance. Evidence for twin deficits in several OECD countries is provided, and differences between the 1980s and the 1990s discerned. Higher investment is found to worsen the current account. Our data sample shows that the CEECs are facing high current account deficits of a historically unprecedented size which are accompanied by high fiscal deficits. Unlike in the first country group, we find no significant relationship between the internal and external imbalances. The Slovak current account deficit has been determined largely by investment, while Estonia and the Czech Republic show no hysteresis of the analyzed variables.

Banking in the Baltics -The Development of the Banking Systems of Estonia, Latvia and Lithuania since Independence:
The Emergence of Market-Oriented Banking Systems in Estonia, Latvia and Lithuania (1988-1997) 
Stephan Barisitz
The paper analyzes the development of banking in the Baltics from the collapse of the USSR up to the second half of the 1990s, when, after having weathered their first profound crises, market-oriented banking sectors with some degree of stability emerged. Estonia, Latvia and Lithuania seem to have broken with their ex-Soviet legacy in a particularly decisive manner. Estonia was one of the first transition countries to witness a banking crisis in 1992-93 and to conduct painful restructuring; Latvia’s banking crisis followed in 1995, and Lithuania’s in 1995-96. Estonia and Lithuania established currency board regimes, whereas Latvia opted for a fixed exchange rate peg operating like a quasi-currency board. Although lender-of-last-resort functions were limited, these clear regimes appear to have improved incentives for credit institutions and reined in moral hazard. Sustained macrostabilization as well as effective structural reforms and privatization proved essential in creating preconditons for a first breakthrough to successful financial intermediation.

Banking in the Baltics – The Development of the Banking Systems of Estonia, Latvia and Lithuania since Independence:
The Internationalization of Baltic Banking (1998-2002) 
Martin Aßdahl
The Baltic banking sectors continued to evolve dynamically in the more recent period, from the impact of the Asian and Russian crises to the internationalization that took hold at the end of the 1990s. A wave of regional consolidation and foreign, mainly Swedish, strategic investments made the crisis years of 1998-99 a turning point. After the crises, the Estonian and Latvian banking sectors achieved rapid lending and deposit growth and strong profitability, so that they caught up with the most developed accession countries, while Lithuanian banks went through a phase of successful restructuring. An important factor behind the success was the robustness of the macroeconomic framework (Estonia, Lithuania: currency boards, Latvia: quasi-currency board regime). The paper focuses mainly on microeconomic factors, such as openness to foreign investment, improved regulation and supervision, and completed privatization, which forced the pace of restructuring of the sector. Important challenges remain ahead, though, in the form of increased competition, and the risk that local supervision comes to rely too heavily on the security of the large Baltic banking groups’ much larger parent banks.

Political Institutions and Pricing of Bonds on International Markets 
Vladimir Zlacky
Systematic investigation of the relationship between political institutions and bond prices on the international markets is lacking. Using data on 78 emerging market countries spanning the period 1991 to 1997, this paper employs a sample selection model to estimate the impact of four dimensions of the political system – a political regime, a coalition nature of the executive, a location of the executive on the left-right political spectrum, and formal checks and balances – on launch bond spreads. The results are as follows: Investors are willing to pay a premium for bonds issued by borrowers from countries where a presidential regime is in place. When purchasing bonds issued by borrowers from the low-credit countries, investors require higher spreads if the governments in those countries are divided. The opposite is true in the high-credit countries. Right-of-center chief executives are associated with a low cost of capital in the high-credit and a high cost of capital in the low-credit countries. The empirical measure of formal checks and balances used in this paper does not help explain variation in launch bond spreads.

Fiscal Effects of EU Membership for Central European and Baltic EU Accession Countries 
Peter Backe
This short study explores the fiscal effects of EU membership for Central European and Baltic EU accession countries. The analysis concludes that, in the short run, membership in the European Union will add to the fiscal strains of Central European and Baltic accession countries. In the medium run, overall effects on the budgets of these countries can be expected to be broadly neutral or slightly positive, while some uncertainty prevails on the magnitude of several individual effects, in particular on future public investment needs.

OeNB Activities
Structural Challenges and the Search for an Adequate Policy Mix
in the EU and in Central and Eastern Europe – The OeNB’s East-West Conference 2002 
Workshop on Fiscal Policy Monitoring in the ESCB – Perspectives for the Accession Countries for ESCB and Accession Country Central Bank Experts 
Lectures Organized by the Oesterreichische Nationalbank
The Balassa-Samuelson Effect in CEE Economies – Balazs Egert 
Presentation of the EBRD’s Transition Report 2002 – Alexander Auböck and Martin Raiser 
The "East Jour Fixe" of the Oesterreichische Nationalbank – A Forum for Discussion
EU Enlargement to the East: Effects on the EU-15 in General and Austria in Particular -
Peter Mooslechner, Doris Ritzberger-Gru‹nwald, Karin Olechowski-Hrdlicka, Helmut Hofer,
Marianne Kager, Edward Ludwig, Peter Schlagbauer and Gabriel Moser 
Inflation in the Transition Economy of Poland: An Application of SVEqCM – Aleksander Welfe 
Monetary Policy in Croatia under a High Level of de facto Euroization – Boris Vujcic 
Technical Cooperation of the Oesterreichische Nationalbank with Countries in Transition 


Statistical Annex
Compiled by Andreas Nader and Maria Dienst
Gross Domestic Product 
Industrial Production 
Unemployment Rate 
Consumer Price Index 
Trade Balance 
Current Account 
Total Reserves Minus Gold 
Central Government Surplus/Deficit 
Gross External Debt 
Exchange Rates 
Official Lending Rate 
Legend, Abbreviations