Adalbert Winkler

Real convergence, financial markets, and the current account - Emerging Europe versus emerging Asia

This paper examines the relevance of financial market characteristics for explaining the catching-up process in Europe and Asia. Global financial integration has been associated with divergent patterns of real convergence and the current account in emerging markets. While countries in emerging Asia have been running sizeable current account surpluses, countries in emerging Europe have been facing large current account deficits. In this paper we test for the relevance of financial market characteristics in explaining this divergence in the catching-up process in Europe and Asia. We assume that the two regions constitute distinct convergence clubs, with the euro area and the United States respectively at their core. In line with the theoretical literature, we find that better developed and more integrated financial markets increase emerging markets´ ability to borrow abroad. Moreover, the degree of financial integration within the convergence clubs - as opposed to the state of financial integration in the global economy - and the extent of reserve accumulation are significant factors in explaining the divergent patterns of real convergence and the current account in the regions under review.

The joint production of confidence: lessons from nineteenth-century US commercial banks for twenty-first-century Euro area governments

This article argues that the crisis in euro area government bond markets reflects the same kind of stability challenges financial intermediaries face when confronted with a negative macroeconomic shock without having access to a lender of last resort. Nineteenth-century US banks operated under such a framework and used clearing houses in times of crisis as a co-insurance mechanism against contagious runs. Their experience provides valuable lessons for the ongoing reform efforts in the euro area. The analysis reveals that most of the instruments clearing houses used in the joint production of confidence are similar to the ones euro area governments have recently decided upon, such as the establishment of the European Financial Stability Facility. This suggests that the euro area crisis response has followed best private-sector practices of crisis management. However, inherent fragilities of co-insurance mechanisms as well as the long maturity and elusive quality of government debt present a challenge in designing a sustainable solution to the crisis without compromising on the original goal of euro area governance: ensuring sound fiscal policies as a prerequisite for maintaining price stability. To meet this challenge a substantially more comprehensive economic and political union might be needed.

The Causes and Nature of the Rapid Growth of Bank Credit in the Central, Eastern and South-eastern European Countries

Credit growth has taken center stage in the policy arena in Central, Eastern, and South-eastern Europe (CEE).2 To some extent, this has not been a surprising development. Indeed, given the under-development of the financial sector at the beginning of the transition, and particularly with regard to lending to the private sector, financial deepening in the region was to be expected. In 1998, the EBRD Transition Report, with a special focus on the financial sector in transition, had already raised the question of whether financial sector development would be a stable process.3 Six years later, stability issues related to strong credit growth have become a key policy challenge, with the 2004 Transition Report warning of financial and macroeconomic “risks over the medium term” posed by the “substantial increases in domestic bank lending” witnessed in many transition countries.4

The Financial Sector and Economic Development: Evidence from Southeast Europe

The turn of the century witnessed a significant renewal of interest in Southeast Europe.2 The international community, notably the European Union (EU), took steps to bring lasting peace and stability to the region under the auspices of the Stability Pact and the Stabilisation and Association Process. These steps have coincided with considerable progress in the countries of Southeast Europe. All of them are now democracies and are forging ahead with political, economic and administrative reforms. International investors have started to identify the oppor-tunities brought about by these changes. Nevertheless, the region has still a very long road ahead before it reaches EU standards of living and economic development. To address this challenge, it is essential to design relevant economic policies and to ensure the appropriate involvement of the private sector. In both respects, the potential contribution of the financial system to economic growth is of particular relevance.

Dual Liquidity Crises—A Financial Accounts Framework

This paper analyzes dual liquidity crises, i.e. funding crises which encompass the private and the public sector, and the shock absorbing capacity of central banks within a closed system of financial accounts. We find that a central bank that operates under a flexible exchange rate is most effective in containing a dual liquidity crisis. A central bank of a euro area type monetary union has a similar capacity as long as the integrity of the union is beyond doubt. By contrast, within any fixed exchange rate system the availability of inter‐central bank credit determines the elasticity of a central bank in providing liquidity. Finally, domestic constraints, i.e. collateral rules, risk taking ability or legal prohibitions, can limit the elasticity of the central banks response to liquidity shocks.

The challenge of rural financial inclusion – evidence from microfinance

ABSTRACT Financial inclusion is said to foster development and growth. However, progress in financial inclusion has been slow in rural areas where poverty is most pronounced. This is often attributed to higher transaction costs, higher risks and a more unfavourable contracting environment which makes it more difficult for financial institutions to achieve and maintain sustainability in rural compared to urban areas. Based on data covering 772 microfinance institutions (MFIs) over the period 2008–2013, we test whether rural financial inclusion, notably lending to rural borrowers, is hampered by stronger sustainability challenges than inclusion in urban markets. Our results suggest that a higher share of rural borrowers has no direct effect on MFI sustainability. However, we find that MFIs with a higher share of rural borrowers are less able to exploit economies of scale and productivity effects. Thus, our results provide support for the view that sustainability challenges make it more difficult to achieve progress in financial inclusion in rural than in urban areas.

The Financial Crisis – a Microfinance Perspective

The global financial crisis has led to a reassessment of the role of finance in modern economies. Does the long-standing view still hold that finance has only a positive impact on growth and development or can financial deepening also raise the likelihood of financial turmoil? The debate has reached the microfinance industry after it has experienced its first credit cycle in history: a credit boom in the precrisis period was followed in 2008-2009 by a severe drop in credit. In this paper we show that conceptually microfinance is the exact opposite of subprime lending as the former employs credit technologies that focus on clients’ cash-flows whereas subprime lending is based on an expected rise of the underlying asset that is financed, i.e. the house. At the same time, microfinance has become more similar to traditional finance by closely following the boom-bust pattern of credit growth. This new development reflects changes in the market environment microfinance operates in, most prominently a rising degree of competition and integration.

Welchen Einfluss hat der Wechselkurs auf die internationale Rolle von US-Dollar und Euro?

Abstract This article analyses the impact of the exchange rate on the role of dollar and euro as international currencies. It is found that exchange rate fluctuations are a major determinant of the international role of currencies only if they reflect sizeable inflation differentials. Accordingly, major changes in the international role of dollar and euro are not to be expected given the continuation of a stability-oriented US monetary policy. However, a move towards more exchange rate flexibility in emerging market economies, reflecting the need for greater monetary policy autonomy, might lead to a relative strengthening of the international role of the euro. 38 C

The EMS crisis and the prospects for European Monetary Union

Interpretations of the causes and implications of the EMS crisis of mid-1993 vary considerably. The following article offers a critical analysis of the most common arguments and draws conclusions for future policy.

Rural Lending and Microfinance Sustainability -- Is Small Beautiful?

Lending to rural borrowers is a key element of pursuing the poverty alleviation mission of microfinance. However, a strong focus on rural areas is said to hamper the sustainability of microfinance institutions (MFIs). We analyze this potential trade-off based on data covering 802 microfinance institutions over the period 2008-2013. We find that increasing the share of rural borrowers over time has only limited impact on MFI sustainability. By contrast, there are substantial cross-MFI effects. A higher share of rural borrowers is associated with better sustainability prospects, in particular when institutions are newly established. However, we also find evidence suggesting that a stronger focus on rural borrowers has a negative impact on sustainability when MFIs either become larger or more productive. Thus, transaction cost disadvantages of rural lending seem to weaken economies of scale and productivity effects that contribute to MFI sustainability in urban areas. Overall, our results provide some support for the view that small is beautiful when MFIs predominantly serving rural borrowers want to achieve sustainability.