Kari Heimonen

Substituting a Substitute Currency: The Case of Estonia

This study evaluates substitution of foreign currency balances in Estonia, a transition economy neighbouring countries participating in EMU. The focus is on substitution between dollar and euro balances in the three basic functions of money - unit of account, store of value and means of payment. While traditional models for currency substitution concentrate on substitution between a domestic currency and aggregate foreign currency balances, we look for substitution between the dollar and the euro or euro-related foreign currency balances. We find substitution between dollarization and euroization to be asymmetric in the short run, which suggests that inertia, irreversibility and ratchet effects favour the euro. No significant evidence of asymmetries in the long run was detected. In general, the traditional model for currency substitution explains the dynamics of the euro and dollar as substitute foreign currencies.

Time-Varying Fundamentals of the Euro–Dollar Exchange Rate

Abstract This study examines changes in the impact of the economic fundamentals on the euro–dollar exchange rate. First, the monetary model is augmented with the equity markets and the model is estimated in its structural form. Second, the time-varying impacts of the long-run fundamentals representing equilibrium in different markets on the euro–dollar exchange rate are examined using Kalman filtering. The time-varying structural model indicated that the relative importance of the different fundamentals was not equal and the impact of the fundamentals was time-dependent.

Coordination of Wage Bargaining, Exchange Rate Stability and External Adjustment

The literature on the determinants of the rate of current account reversion has been limited to examining the role of exchange rate regimes. We propose that the degree of coordination of wage bargaining affects the speed of current account adjustment. Our point estimates are economically and statistically significant, suggesting that fragmented firm-level wage bargaining facilitates external adjustment. We also find a strong negative interaction between the effects of coordination of wage bargaining and exchange rate stability on the rate of current account reversion.

Culture and current account balances

This article contributes to the literature of current account balances by introducing cultural variables that until now have been omitted. The World Values Survey indicates that the Roman Catholics do not consider thrift as important as others. We propose that Catholic countries tend to run current account deficits. This result remains robust even if we control for close to all of the determinants that have been included in previous studies. We find evidence that the inclination of Catholic countries to have high levels of uncertainty avoidance goes to a great length in explaining the result.

Blessed Mary, Forgive Us Our Deficits

Many studies have explored the medium-term determinants of current account balances. This paper contributes to the existing literature by introducing religious variables that until now have been omitted. We propose that Catholic countries tend to run current account deficits. This result remains robust even if we include both the official financial flows and the variables measuring the quality of institutions. In total we control for close to all of the variables that have been included in previous studies. To rationalize our result we consulted the World Values Survey and discovered that Roman Catholics do not consider thrift as important as other religious groups.