Prague Economic Papers, 2006 (vol. 15), issue 4

Original contributions, Original article, Research article

Tests of Functional Forms, Currency Substitution, and Capital Mobility of Czech Money Demand Function

Yu Hsing

Prague Economic Papers 2006, 15(4):291-299 | DOI: 10.18267/j.pep.289  

The demand for real M2 in the Czech Republic is positively influenced by real output and negatively associated with the deposit rate, the koruna/euro exchange rate, and the euro interest rate. The coefficient of real output for the demand for real M1 is insignificant. Hence, depreciation of the koruna or a higher euro interest rate would help raise Czech real output. The Box-Cox transformation test shows that the log-linear form for real M1 and M2 demand cannot be rejected at the 5% level while the linear form for real M1 and M2 demand can be rejected at the 5% level. The CUSUM and CUSUMSQ tests show that parameters in the demand for both real M1 and...

Inflation Targeting: To Forecast or To Simulate?

Michal Skořepa, Viktor Kotlán

Prague Economic Papers 2006, 15(4):300-314 | DOI: 10.18267/j.pep.290  

Perhaps the most notable development in the area of monetary policy over the last decade is the growing popularity of inflation targeting. This regime is based to a great extent on communication and, more specifically, on using and communicating assessments of future inflation. The central banking literature, however, devotes surprisingly little attention to some important issues connected with such assessments. There are some non-trivial choices that need to be made regarding future inflation assessments on three distinct levels: construction, decision making and communication. One of the most important choices relates to the treatment of central...

Procyclicality of Financial and Real Sector in Transition Economies

Mejra Festić

Prague Economic Papers 2006, 15(4):315-349 | DOI: 10.18267/j.pep.291  

Financial sector is prone to cyclical movements and procyclicality of the financial system may endanger financial stability, which depends on asset prices and loan losses due to the fact that the deterioration of bank assets through non-performing loans is characteristics of banking distress. This was the case during Japan's lost decade and the Nordic banking crises. Even the classic banking panics of the Great Depression are being revised in the light of new evidence on the fundamental deterioration of bank assets. Much empirical evidence supports the view that balance sheet variables, such as net worth affect investment and produce business cycle...

Impact of Price-Deregulation on Market Outcomes - The Case of Chimney Sweep Services in Slovenia

Egon Žižmond, Matjaž Novak

Prague Economic Papers 2006, 15(4):350-363 | DOI: 10.18267/j.pep.292  

In transition countries, especially in the period of central planning or semi-command regulation, prices of goods and services in the non-tradable sector were regulated, which was one of the main obstacles to normal functioning of the supply-demand market mechanism after the breakdown of the socialist economic system. In the period of economic transition reestablishment of market institutions arises, with price deregulation as one of the fundamental constitutional parts of this process. But in the case of transition economies there exists a recognized doubt in an immediately well functioning market system after deregulation because of inadequate development...

Third Moment of Yield Probability Distributions for Instruments on Slovenian Financial Markets

Srečko Devjak, Andraž Grum

Prague Economic Papers 2006, 15(4):364-373 | DOI: 10.18267/j.pep.293  

Due to the capital decree legislated by the Bank of Slovenia, Slovenian commercial banks can apply internal models for capital requirements calculation for currency risk and selected market risks (general position risk in line with debt and equity instruments, price change risk for commodities) as an alternative or in combination with standardised methodology. In risk management process banks consider the first and the second moment of a yield probability distribution as portfolio managers seek to achieve the best possible trade-off between risk represented by variance of returns and expected return. In cases when liquidity of instruments on financial...