Josip Tica

Threshold Model of the Exchange Rate Pass-Through Effect

This paper investigates the exchange rate pass-through (ERPT) effect in Croatia using a threshold model. To date, empirical studies have failed to find a high degree of ERPT in Croatia, even though exchange rate stability has been one of the goals of monetary policy throughout the transition period. Using a nonlinear model, this study demonstrates that ERPT is present in the data and shows why it cannot be detected with a linear model. According to our estimates, there is a threshold at 5.91 percent of the monthly growth rate of the nominal exchange rate of the German mark (euro), with the 95 percent interval between about 2.7 and 21.8 percent. Consistent with the theories of sticky prices or pricing to market, ERPT is asymmetric around the threshold: below it, the ERPT effect is weak or statistically insignificant, and above it, the effect is strong and significant.

Real Interest Parity in New Europe

In this paper we investigate the real interest parity condition in ten Eastern European transition countries during 1997-2009. Our sample is interesting because it covers important periods or events: the second stage of economic transition in the aftermath of the collapse of socialism; the establishment of the eurozone at the turn of the century; and the enlargement of the eurozone to include the Eastern European countries of Slovenia and Slovakia. The data enable us to investigate how the introduction of market mechanisms in the early 1990s and the establishment and enlargement of the eurozone acted on real interest rate convergence. We test the real interest parity condition using a unit root test with and without structural breaks. Inflationary expectations are estimated in two ways: (1) under assumption of rational expectations with ex post inflation rates, and (2) with ex ante adaptive inflation expectation modeled using an ARIMA/ARC H model. Results suggest that there is strong evidence of stationarity and relatively weaker evidence of structural breaks, particularly when using adaptive inflation expectations.

Harrod, Balassa, and Samuelson (re)visit Eastern Europe

Abstract In this paper, we investigate the Harrod–Balassa–Samuelson (HBS) hypothesis in 11 Central and Eastern European transition countries. Unlike previous research, we test the HBS hypothesis with NACE 6 quarterly data which enables us to divide data into tradable and nontradable sectors without requiring unrealistic assumptions on the nature of the data. Contrary to previous results, we are only able to find evidence for univariate HBS effects in Bulgaria, Croatia, Hungary, and Poland. However, using panel cointegration tests, we find strong statistical evidence for the HBS hypothesis within countries and across countries. Our results also demonstrate that cross-country HBS holds under the assumption that the law of one price for tradables does not hold. Finally, we find, contrary to theory, that government consumption negatively impacts relative prices. The policy implications are that failing to acknowledge the peculiarities of the transition process results in suboptimal monetary policy.

Forecasting Croatian inbound tourism demand

The aim of this paper is to present a forecasting model for the overnight stays of foreign tourists in Croatia. Tourism is one of the most important parts of the Croatian economy. It is particularly important in the context of the services sector. Regular and significant surpluses and the consumption of foreign guests are an important element of budget revenues, especially VAT. The ability to forecast the development of inbound tourism demand in a timely manner is crucial for both business decisions and policy-making. We combine the Granger causality test for identifying leading indicators with a grid search of the weights used to construct a composite indicator. An endogenous grid search for data driven weights was employed to minimise the mean absolute percentage error (MAPE) of the out-of-sample forecast. In total, we carried out 7.7 billion out-of-sample regressions in order to find the optimal combination of leading indicator weights. Results indicate that only four out of the 12 identified leading indicators are relevant in explaining variations in inbound tourism demand. The most important leading indicators are: real GDP and imports in Poland and gross wages in the Czech Republic and Slovakia.

The panel VAR approach to modelling the housing wealth effect : evidence from selected European post-transition economies

Abstract Following Friedman’s permanent income hypothesis and Ando and Modigliani’s lifecycle hypothesis, this paper empirically studies the role of house prices and income in determining the dynamic behaviour of consumption in selected European post-transition economies using the panel vector autoregression (PVAR) approach and quarterly data covering the period from the first quarter of 2002 until the second quarter of 2012. With the shocks being recognized using the customary recursive identification scheme, we found that the response of personal consumption to the housing wealth shock is initially positive, but short lived.

Public debt and economic growth conundrum: nonlinearity and inter-temporal relationship

Abstract The influential paper by Reinhart and Rogoff (Reinhart, C. M., and K. S. Rogoff. 2010. “Growth in a Time of Debt.” The American Economic Review 100: 573–578.) has triggered a debate about the effects of the public debt on GDP growth. They argue that a debt-to-GDP ratio of over 90 percent has a deleterious effect on long-run economic growth. In this paper, we examine the inter-temporal relationship between public debt and GDP growth rates. We examine debt-to-GDP thresholds in nonlinear panel models, using various econometric strategies, methodologies, and data samples. We also evaluate confidence intervals around the estimated thresholds to determine the accuracy of estimated thresholds. Our results demonstrate that in the majority of estimated models, threshold values are not uniquely defined and the estimated coefficients are insignificant in most model specifications, as in Enders, Falk, and Siklos (Enders, W., B. L. Falk, and P. Siklos. 2007. “A Threshold Model of Real US GDP and the Problem of Constructing Confidence Intervals in TAR Models.” Studies in Nonlinear Dynamics & Econometrics 11: 1322.). Next, we examine the inter-temporal relationship between the public debt and economic growth using structural panel data models as well as reduced form panel VAR models. In contrast to the standard presumption in the literature, we find that the inter-temporal effect of economic growth on the public debt is strong, but the effect of the public debt on economic growth is weak. We find similar results in sub-samples that include countries where the public debt is over 90 percent of GDP.