Tomislav Globan

Inflation in New EU Member States: A Domestically or Externally Driven Phenomenon?

ABSTRACT This article empirically analyzes the domestic and external inflation determinants for eight non-eurozone new EU member states (NMS), using a structural vector autoregression model. Results indicate that foreign shocks are a major factor in explaining inflation dynamics in the medium run, while the short-run inflation dynamics are mainly influenced by domestic shocks. Moreover, the importance of the foreign inflation component has had a rising trend in the precrisis period in all NMS and mostly coincided with their accession to the EU. This trend ended with the onset of the global financial crisis. The study implicates the need to augment the classical Taylor rule with foreign factors in the case of small open economies.

Household debt as a determinant of retail and personal consumption – the case of Croatia

The main goal of this paper is to determine the main characteristics and determinants of retail trade in Croatia over the last 20 years, and to analyse its retail turnover in comparison with other EU countries, especially during the last economic crisis. Using a regression model, the paper econometrically tests the hypothesis that the speed of the post-crisis recovery in retail turnover can be explained by the debt levels accumulated in the pre-crisis period. The results of the analysis indicate the negative correlation between variables, which means that the countries that had the lowest levels of accumulated private debt, on average experienced the fastest recovery of retail turnover in the post-crisis period, and vice versa. The weaker correlation has been found in case of retail sales of food, beverages and tobacco products, which leads us to the conclusion that its consumption was not mainly financed by borrowing and, also, that its recovery does not depend primarily on the level of household debt. The analysis for the non-food sector indicated a very high dependence of this type of consumption on household debt, which remains one of the main impediments to its recovery.

Testing the 'trilemma' in post-transition Europe - a new empirical measure of capital mobility

This article develops a new empirical measure of capital mobility. It tests the hypothesis that the degree of capital mobility can be estimated by measuring the reaction intensity of capital flows to shocks in interest rates on a sample of eight European post-transition economies. This hypothesis can be derived from the Mundell–Fleming open economy model, the implications of which are essentially based on the assumption of a close link between the degree of capital mobility in a country and the reaction of its capital flows to changes in domestic and external interest rates. Precisely because of this interrelationship, policy makers, in theory, face the policy ‘trilemma’ or the ‘impossible trinity’, i.e. the inability to achieve the following three objectives simultaneously – a stable exchange rate, financial openness and an independent monetary policy. Using impulse response and historical decomposition analysis in a VAR framework, the results show a significant increase in the explanatory power of interest rates for the movement of capital flows shortly before and after the accession of post-transition economies to the European Union. On the other hand, the recent financial crisis made capital flows less sensitive to interest rates owing to increased risk aversion on international capital markets. Results suggest that the degree of capital mobility, i.e. the level of financial integration with EU-15, is highest in Bulgaria, Latvia and Lithuania and least pronounced in Poland and Croatia. Results are verified by a number of robustness checks, with three separate alternative measures of capital mobility confirming the results obtained from the econometric model.

Contradicting the Twin Deficits Hypothesis: The Role of Tax Revenues Composition

The general theory of twin deficits hypothesis does not consider specific characteristics of domestic tax systems, i.e. whether the revenue side of the budget is dominated by indirect or by direct taxes. The main hypothesis of the paper is that in countries with fiscal systems dominated by indirect taxes, the deterioration of the current account balance would imply higher fiscal revenues due to larger imports and consumption. The hypothesis is based on the characteristics of domestic tax systems of Bulgaria, Croatia, Poland and Romania in which indirect tax revenues account for the majority of total budget tax revenues. Results suggest that the co-movements of the current account and the fiscal balance cannot be explained by the twin deficit theory in countries with indirect tax-oriented systems. These results imply that only the structural economic transformation and export orientation of the economy may reverse the causality direction between two deficits.

Financial supply cycles in post-transition Europe – introducing a composite index for financial supply

Abstract This paper introduces a new composite index – the financial supply index (FSI) – measuring the level of supply of foreign capital to small open economies. FSI is estimated on a sample of 11 EU new member states (NMS) applying Kalman filtering, principal components and variance-equal weights. Results indicated that the main drivers of financial supply to NMS are externally determined, with economic sentiment and business climate in the Eurozone carrying the highest weight. FSI proved to have a good predictive power for debt inflow dynamics. In addition, we create a new indicator – the Refinancing Risk Ratio, which relates the supply and demand for foreign capital – to quantify the external refinancing conditions and risk faced by the government. We distinguish between two recent episodes of high refinancing risk – one during the global crisis, and the other during the European sovereign debt crisis – but the episodes significantly differ in nature.

MULTIPLE OWNERSHIP, COLLUSION AND UNUSUAL RESULT PATTERNS IN SOCCER: COLLUSION AND UNUSUAL RESULT PATTERNS IN SOCCER

Expanding on the literature on antitrust, multiple ownership, and collusion in sports, this paper finds a very unusual result pattern between two clubs competing in the Croatian soccer league—Lokomotiva and Dinamo Zagreb. Their close sporting and business relationship has raised many questions about the possible collusion between them, potentially affecting the integrity of the competition. We analyze all matchups in the competitions 25‐year history to single out those characterized by biggest under‐ and overperformances by competing clubs. Our findings provide some support to the allegations of a possible collusion between the clubs as Lokomotivas underperformance against Dinamo is so far in the tail of normal distribution that it has a lower occurrence probability than a random person being hit by lightning. (JEL Z29, K21, L83).

Does the Cohesion Policy Decrease Economic Inequalities in the European Union

Abstract This paper examines the impact of the EU Cohesion Policy on the relative development of EU countries as well as on the development of NUTS-2 regions within member states. The main hypothesis is that the Cohesion Fund payments are reducing inequalities between member states, while failing to decrease the regional inequalities within member states in the European Union. The basic conclusion is that Cohesion funds should not be viewed as the only solution for the problem of regional inequalities in the EU, but rather as a complementary policy instrument to national regional policies. However, the problem of creating institutional capacity for the withdrawal of the Cohesion resources remains emphasized, especially in new member states with lower real GDP growth, in order to compete for projects of highest multiplicative effects on the economy.

The Prizes and Pitfalls of Large Capital Inflows in a Small Integrated Economy — Case of Croatia

This paper studies the macroeconomic and financial implications of large capital inflows in a small integrated economy by examining the case of Croatia and other EU new member states. Croatia was one of the countries that have experienced very large, dominantly debt inflows in the pre-crisis period. The question of implications of capital inflows is an important one, due to the fact that they have created dangerous macroeconomic imbalances, along with policy and prudential challenges for the policy holders. The analysis has shown that capital inflows positively impacted economic growth in the pre-crisis period and accelerated the development of the financial system in Croatia and EU NMS as well, but also fueled higher inflation rates, worsened current account balances, increased the indebtedness of countries and appreciated real exchange rates, which created severe policy challenges when the crisis hit. The contribution of the paper is reflected in emphasizing the importance of differentiating between types of foreign financing, given that short-term debt flows provide more exposure to potentially harmful macroeconomic and financial imbalances than long-term equity financing.