Prague Economic Papers, 2008 (vol. 17), issue 3

Original contributions, Original article, Research article

Stress testing of the czech banking sector

Petr Jakubík, Jaroslav Heřmánek

Prague Economic Papers 2008, 17(3):195-212 | DOI: 10.18267/j.pep.329  

The results of stress tests of the Czech banking sector based on credit risk and credit growth models, applied to the household and corporate sector are presented in the paper. The use of these newly developed models enables the stress tests to be linked to the CNB's official quarterly macroeconomic forecast. In addition, the article updates the stress scenarios, including simple sensitivity analyses of credit risk for individual sectors. Based on the analysis, an answer is sought to the question of whether the observed credit growth to corporate sector and households poses any threat to the stability of the banking sector. The analyses conclude that...

Models of political cycles: the czech experience

Radka Štiková

Prague Economic Papers 2008, 17(3):213-229 | DOI: 10.18267/j.pep.330  

This paper studies whether the dynamic behaviour of real GDP, unemployment and inflation is systematically affected by the timing of elections and by changes of government in the Czech Republic. Two basic models of political cycles are tested - political business cycle models and partisan theories. Political business cycle models emphasize the opportunistic behaviour of incumbents who strive to get re-elected regardless of party affiliation. On the other hand, partisan politicians are faithful to their ideological opinions and therefore attract a specific constituency. The tests partly support the opportunistic motives for the behaviour of Czech politicians....

History and troubles of consumer surplus

Miroslav Svoboda

Prague Economic Papers 2008, 17(3):230-242 | DOI: 10.18267/j.pep.331  

The paper is focused on history of the concept of consumer surplus presented by Alfred Marshall as an economic tool to measure benefits and losses resulting from changes in market conditions. As it assumes constant marginal utility of money, it was refused by further development of economics. Subsequently, John Hicks redefined the concept using indifference analysis, inducing the use of compensating and equivalent variations in welfare economics. However, we reveal substantial errors in the Kaldor-Hicks-efficiency justification of economic policy and suggest an alternative use for the concept of consumer surplus - in an analysis of economic discrimination.

An empirical application of a two-factor model of stochastic volatility

Alexandr Kuchynka

Prague Economic Papers 2008, 17(3):243-253 | DOI: 10.18267/j.pep.332  

This contribution focuses on the modelling of volatility of returns in Czech and US stock markets using a two-factor stochastic volatility model, i.e. the volatility process is modeled as a superposition of two autoregressive processes. As the volatility is not observable, the logarithm of the daily range is employed as the proxy. The estimation of parameters and volatility extraction are performed using the Kalman filter. We have obtained a meaningful decomposition of the volatility process into one highly persistent factor and another quickly mean-reverting factor. Moreover, we have shown that although the overall level of the volatility of returns...

Towards measurement of political pressure on central banks: the case of the central bank of egypt

Ibrahim L. Awad

Prague Economic Papers 2008, 17(3):254-275 | DOI: 10.18267/j.pep.333  

This paper assesses whether the legal independence granted to the Central Bank of Egypt (CBE) by the latest legislation promulgated in 2005 is factual. The author followed Fry's methodology, which assumes that the level of independence of the central bank is determined by fiscal attributes. In an attempt to develop Fry's method, there was used a simple criterion to assess the central bank's independence, namely, that the central bank is actually independent if it can fulfill its money supply target without squeezing the private sector. Applying this criterion to the case of the CBE, we find that the legal independence granted to the CBE by the latest...