Zsolt Darvas

Should non-euro area countries join the single supervisory mechanism?

Abstract Irrespective of the euro crisis, a European banking union makes sense, including for non-euro area countries, because of the extent of European Union financial integration. The Single Supervisory Mechanism (SSM) is the first element of the banking union. From the point of view of non-euro countries, the draft SSM regulation as amended by the EU Council includes strong safeguards relating to decision-making, accountability, attention to financial stability in small countries and the applicability of national macroprudential measures. Non-euro countries will also have the right to leave the SSM and thereby exempt themselves from a supervisory decision. The SSM by itself cannot bring the full benefits of the banking union, but would foster financial integration, improve the supervision of cross-border banks, ensure greater consistency of supervisory practices, increase the quality of supervision, avoid competitive distortions and provide ample supervisory information. While the decision to join the SSM is made difficult by uncertainty surrounding other elements of the banking union, including possible burden sharing, we conclude that non-euro EU members should stand ready to join the SSM and be prepared for negotiations on the other elements of the banking union.

Exchange Rate Policy and Economic Growth after the Financial Crisis in Central and Eastern Europe

In a paper on the effects of the global financial crisis in Central and Eastern Europe (CEE), a European Union economist reacts to a companion paper (Åslund, 2001) published in the same issue of Eurasian Geography and Economics on the influence of exchange rate policies on the regions recovery. The author argues that post-crisis corrections in current account deficits in CEE countries do not in themselves signal a return to steady economic growth. Disagreeing with Åslund over the role of loose monetary policy in fostering the regions economic problems, he outlines a number of competitiveness problems that remain to be addressed in the 10 new EU member states of CEE, along with improvements in framework conditions supporting future macroeconomic growth.

Estimation Bias and Inference in Overlapping Autoregressions: Implications for the Target-Zone Literature*

Samples with overlapping observations are used for the study of uncovered interest rate parity, the predictability of long run stock returns, and the credibility of exchange rate target zones. This paper quantifies the biases in parameter estimation and size distortions of hypothesis tests of overlapping linear and polynomial autoregressions, which have been used in target zone applications. We show that both estimation bias and size distortions generally depend on the amount of overlap, the sample size, and the autoregressive root of the data generating process. In particular, the estimates are biased in a way that makes it more likely that the predictions of the Bertola-Svensson-model will be supported. Size distortions of various tests also turn out to be substantial even when using a heteroskedasticity and autocorrelation consistent covariance matrix.

Inflation persistence in central and eastern European countries

This article studies inflation persistence with time-varying coefficient autoregressions for 12 central European countries in comparison with the United States and the euro area. We find that inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence has declined both in the United States and the euro area. In most central and eastern European countries, for which our study covers 1993–2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable. Our findings have implications for the conduct of monetary policy and for a possible membership in the euro area. Among the two time-varying coefficient methods we use, our results favour the flexible least squares smoother over the Kalman smoother. We also conclude that the OLS estimate of an autoregression is likely upward biased relative to the time-average of time-varying parameters, when the parameters change.

Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates

This paper shows that error correction models assuming that long-maturity forward rates are stationary outperform the random walk in out of sample forecasting at forecasting horizons mostly above one year, for US dollar exchange rates against nine industrial countries’ currencies, using the 1990-2006 period for evaluating the out of sample forecasts. The improvement in forecast accuracy of our models is economically significant for most of the exchange rate series, and statistically significant according to a bootstrap test. Our results are robust to the specification of the error correction model and to the underlying data frequency.

Facts and Lessons from Euro Area Divergences for Enlargement

The Euro and Economic Stability assesses the euro area’s merits as a shelter and the merits of euro assets as a safe haven and reviews the case for rapid euro adoption from a post-crisis view. Policymakers and economists provide relevant lessons from euro area divergences for future euro area members and, more generally, from the financial crisis, while banking representatives discuss post-crisis business models of banks in the area. Last but not least, a theoretical introductory chapter fills the gap between mainstream macroeconomic modelling and real-world decision-making.

Is technological progress behind growing income inequality

Income inequality might be boosted by skill-biased technical change, which shifts production to technology that favours skilled over unskilled workers and thereby might increase the wages of skilled relative to unskilled workers. Robotisation and globalisation might also increase income inequality, due to the reduced number of jobs and reduced wages of certain less skilled workers. However, we cast doubt on the hypothesis that technology-driven developments were a major factor behind rising inequality in the United States and some other advanced countries. Despite many similarities in labour market developments, the skill premium and income inequality evolved differently in the United States and the European Union. We show that the United States was an outlier to the cross-country relationship between the unemployment rate of tertiary-educated workers and their pay rises, and also an outlier to the relationship between the share of tertiary-educated workers and their wages relative to lower-educated peers. Therefore, even though our analysis suggests that technological change tends to favour those with greater skills, it is hard to see how this has contributed to rising income inequality. Other factors, such as redistribution, social protection and education policies or the regulation of certain professions may be more relevant.