Mejra Festić

The overheating of five EU new member states and cyclicality of systemic risk in the banking sector

Rapid credit growth has been one of the most pervasive developments in recent years in Central and Eastern Europe. We tested for the significance of macroeconomic and banking sector variables that condition non‐performing loan ratios and the hypothesis of procyclicality between economic activity and improving banking‐sector results in the Baltic States, Bulgaria and Romania. The theory of procyclicality between economic activity and the non‐performing loan ratio was proven. The increased economic activity improved the loan portfolio quality of the banking sector, as indicated by a lower NPL ratio. Due to a high share of loans denominated in a foreign currency and the fact of productivity gains in the tradable sector, the appreciation of the real exchange rate contributed to an improvement in loan portfolio quality. The procyclicality of banking sector performance and high economic activities growth could be a signal of an economy overheating and therefore a slowdown in economic activity is likely to accelerate the growth of the non‐performing loan ratio in the Baltic States, Bulgaria and Romania.

The Up-Coming Crisis and the Banking Sector in the Baltic States

We tested for the significance of macroeconomic variables that condition nonperforming loan (NPL) ratios. The hypothesis of procyclicality between economic activity and improving NPL ratio in the Baltic States was proved. The increased economic activity improved the NPL ratio. Due to a high share of loans denominated in a foreign currency and the fact of productivity gains in the tradable sector, the appreciation of the real exchange rate contributed to an improvement in NPL ratio. The procyclicality of banking sector performance and high economic activities growth could be a signal of an economy overheating in the Baltics.

Disinflation in Slovenia: Evidence from an Iterative Multisectoral Model

This article employs an iterative multisectoral model underpinned by estimates of sectoral price functions to simulate six disinflation scenarios for the Slovenian economy. The model simulations show that substantial progress in disinflation can be made during 2004. However, instead of relying on a single anti-inflationary tool, stabilization of the inflation rate at around 3-4 percent per annum demands highly coordinated implementation of at least three instruments: moderate deindexation of wages, rigorous price policy in those segments of the Slovenian economy where lack of competition does not assure price stability, and a prudent monetary policy.

Multiscale test of CAPM for three Central and Eastern European stock markets

This paper examines the systematic risk and validity of the basic capital asset pricing model of Sharpe (1964), Lintner (1965) and Mossin (1966) in three Central and Eastern European stock markets (i.e. Slovenia, Hungary and Czech Republic). The CAPM is tested on a multiscale basis, building on the Fama and MacBeth (1973) methodology and applying two modern econometric techniques -- wavelet analysis and generalized method of moments estimation. Empirical results indicate that the systematic risk and validity of CAPM implications are multiscale phenomena. Empirical evidence in support of CAPM implications in the investigated Central and Eastern European stock markets is found to be weak. The most commonly violated CAPM hypotheses are the zero Jensens alpha condition, positive market premium, and the non-systematic influence of non-observable variables on the excess returns of stocks in these stock markets.

The sustainability of banking sector results in three new European Union members

This article examines a range of variables influencing non-performing loan (NPL) ratios in the Czech Republic, Slovakia and Slovenia, as an indicator of the sustainability of banking sector results. Two basic conclusions were drawn from the empirical analysis. First, since the pro-cyclicality of the banking sectors assets quality and export growth has been proven, the weakening of foreign demand could be expected to aggravate their NPL ratio. Second, in the observed sample of countries, the rising credit/asset ratio increased the NPL ratios dynamics, which indicates the need to devote more attention to supervising banks lending activities.

The Conditions for Monetary Targeting in Slovenia

If money multipliers are stable, there is a relationship between the controllable variable - base money (B) - and intermediate targets such as M1, M2, and M3. These intermediate targets have a long-term and stable relationship with the final target, the price level. If potential output, money demand, and velocity are predictable, a strategy of monetary targeting can be successful in the period before Slovenia joins the European Monetary Union. This article examines the stability of money multipliers and transmission mechanisms from money to prices for Slovenia. It concludes that these are sufficiently stable to make monetary targeting a feasible monetary policy for Slovenia. ments between tolar and foreign currency deposits that are included in it. The target annual growth rate of aggregate M3 in 1997 was 14–22 percent, and 18–26 percent in 1998. In 1998, aggregate M3 increased by 22.2 percent, only 2.2 percentage points above the lower limit. The target for 1999 was an annual increase of M3 by 16–24 percent and for 2000, 12–18 percent (Bilten BS). We will test stability of the relationship between monetary and real aggregates in Slovenia. Such stability is the prerequisite for effective monetary policy, including a policy of inflation targeting. The Transmission of Monetary Impulses Tobe successful, monetary policy must include an accurate assessmentIf money multipliers are stable, there is a relationship between the controllable variable - base money (B) - and intermediate targets such as M1, M2, and M3. These intermediate targets have a long-term and stable relationship with the final target, the price level. If potential output, money demand, and velocity are predictable, a strategy of monetary targeting can be successful in the period before Slovenia joins the European Monetary Union. This article examines the stability of money multipliers and transmission mechanisms from money to prices for Slovenia. It concludes that these are sufficiently stable to make monetary targeting a feasible monetary policy for Slovenia. ments between tolar and foreign currency deposits that are included in it. The target annual growth rate of aggregate M3 in 1997 was 1422 percent, and 1826 percent in 1998. In 1998, aggregate M3 increased by 22.2 percent, only 2.2 percentage points above the lower limit. The target for 1999 was an annual increase of M3 by 1624 percent and for 2000, 1218 percent (Bilten BS). We will test stability of the relationship between monetary and real aggregates in Slovenia. Such stability is the prerequisite for effective monetary policy, including a policy of inflation targeting. The Transmission of Monetary Impulses Tobe successful, monetary policy must include an accurate assessment

Are Wages an Important Determinant of Inflation in Slovenia

A key issue for macroeconomic stabilization and reform programs in transition countries is whether the persistence of moderate inflation results from the traditional causes of insufficiently tight financial policies and wage pressures or from conditions peculiar to transition economies: specifically the sizable adjustment of relative prices necessary for the transition to a market-based economy. Money growth, inertia, and wage pressures play a dominant role in explaining inflation in transition economies. Five key variables largely explain the stickiness of inflation in transition economies (IMF 1998: 241-44; IMF 1997: 106-9): -inflation inertia reflecting explicit or implicit wage indexation and the slow adjustment of inflation expectations; -wage increases that are out of line with productivity gains; -monetary growth fueled by fiscal obligations, often reflecting delayed structural reforms; -underlying pressure for an appreciation of the real exchange

A Comparison of Electricity Generation Reference Costs for Different Technologies of Renewable Energy Sources

The target value for electricity production from renewable resources in Slovenia till 2020 has amounted to additional 3.146 GWh. The highest share of this additional electricity will be obtained in majority from hydro power plants: additional 1.299 GWh will be obtained from big hydro power plants (that requires 618,3 mio € for investment); wind power plants with additional 567 GWh (that requires 345,6 mio € investment); photovoltaic with 469 GWh (which requires 1.641,5 mio € additional investment); biomass with additional 267 GWh (that requires 11,3 mio € of investment); small hydro power plants with additional 194 GWh and the needed investment amount of 148,8 mio €; natural gas with additional 191 GWh (that requires the investment amount of 95,5 mio €); and geothermal power plants with 150 GWh (that required investment amount of 93,8 mio € investicij). (Kavkler, Festic, Repina 2009).

The up-coming crisis and loan portfolio quality in Romania and Bulgaria

We analysed the relationship between the non-performing loan ratio and macroeconomic variables as a source of systemic risk, in order to assess the vulnerability of the banking sector to bad-loan performance on a macroeconomic level by panel regression. The theory of procyclicality between net exports, GDP, foreign direct investments and the non-performing loan ratio was proven. Increased economic activity improved the loan portfolio quality of the banking sector, as indicated by a lower NPL ratio. Due to a high share of loans denominated in a foreign currency and the fact of productivity gains in the tradable sector, the appreciation of the real exchange rate contributed to an improvement in loan portfolio quality. A slowdown in economic activity is likely to accelerate the non-performing loan ratio in Bulgaria and Romania.

Are the New EU Member States Prepared for the Flexicurity System

Social policy and labour market policy in the EU are facing a challenge to regulate a dynamic labour market in the context of the globalised economy. The New Member States are seeking more stability and security in order to en- courage employers to invest more in human capital to be able to boost productivity and competitiveness. Countries need to promote more flexibility and adaptability for both - enterprises and workers, and to better balance them with security. Flexicurity system contributed to higher employment and also to higher mobility between unemployment and employ- ment labour force in some west European economies. Attitudes, values and tradition of certain economy are preconditions for successfulness of the flexicurity system.