This special issue of Emerging Markets Finance & Trade collects selected papers presented at the EuroConference2014 of the Society for the Study of Emerging Markets (SSEM) held in collaboration with the Budapest University of Technology and Economics, Department of Finance, on July 6–8, 2014. This International Conference on Emerging Markets Business, Economics, and Finance featured two keynote speaker presentations by Josef C. Brada (“Growing Income Inequality as a Challenge to 21st Century Capitalism”) and Imre Tarafás (“Exchange Rates and Capital Flows”), as well as a workshop by Ali M. Kutan on how to publish in top business journals. We had more than 130 regular session articles. After a review process, five of the presented papers are selected for publication in this special issue of Emerging Markets Finance & Trade.
Today as emerging markets play a vital role in the world economy, it becomes ever more important for economists and other social scientists in order to understand the similarities and differences between developed and emerging economies and the reasons behind these distinctions. It is important to understand whether fiscal or monetary policy-makers or investors face the same problems and whether different policy tools have the same effect on emerging markets. The papers presented at the SSEM EuroConference2014 attempt to answer these questions. This special issue offers some of the outstanding work presented at the conference.
In the first paper, Julide Yildirim and Sureyya Dal explore the relationship between labor force and social assistance program participation decisions in Turkey based on the 2011 household budget survey data. Social protection plays an important role in poverty reduction and ensuring an equitable access to the benefits of growth. The authors provide three major contributions: (i) their empirical results indicate that participating in a social assistance program and employment likelihood are negatively associated both in urban and rural areas; (ii) the household type and composition are important factors affecting individual decision making process; and (iii) there are differences in the decision making process of individuals in rural and urban areas. This latter finding is very interesting and has a real message for policy-makers.
In the next paper, Sunju Hwang and Hahn Shik Lee investigate the term structure of interest rates from a predictive point of view based on the liquidity premium theory. Applying a Korean bond dataset to capture economic fluctuations, the authors decompose the contribution of the spread into the effect of expected future changes in short rates and the effect of the term premium. In this way, they examine whether and to what extent the predictive power of the term spread for real economic activity can be enhanced, using both regression analysis and probit model. Furthermore the paper investigates the forecasting performance of both the expectations and the term premium effects as compared to the usual term spread. Overall, the results indicate that the decomposition generates higher prediction power for the business-cycle turning points than the usual term spread.
In the third paper, Christian Mulder, Roberto Perrelli, and Manuel Duarte Rocha analyze the role of bank and corporate balance sheets on early warning systems (EWS) of currency crises. Recent literature on third-generation models of currency crises explores aspects other than traditional macroeconomic fundamentals at the root of the turmoil in emerging markets. The authors develop EWS that incorporate banks’ balance sheet indicators in econometric models that estimate the probability of currency crisis episodes in emerging market economies. Together with a country’s macroeconomic position, legal environment, and corporate balance sheets, the information from banks’ balance sheets is shown to be a strong leading indicator of external vulnerability. The authors focus on balance sheet measures of debt structure, financial leverage, liquidity, and profitability to study the likelihood of currency crisis episodes. Using a dataset for 19 emerging market economies during 1991–2001, they run in and out of sample tests and find that banks’ balance sheet indicators improve substantially the predictive power of EWS. Their result can help policy-makers in designing surveillance strategies tailored for heterogeneous levels of risk tolerance and country characteristics.
The fourth paper by Dmitri Blueschke, Klaus Weyerstrass, and Reinhard Neck examines possible fiscal strategies for the government to respond to different economic situations. Employing data for the period 2014–2020, they simulate how a reduction in three variables, namely, government consumption, public investment, and transfers, or an increase in the personal income tax rate influence the following variables: GDP growth, inflation, unemployment rate, budget balance ratio to GDP, and debt ratio to GDP. Their results show that, although the deficit threshold of the Maastricht treaty can be fulfilled in all the modeled settings, the growth of public debt is more difficult to control. They find policies of cutting transfers and raising taxes less problematic in budget consolidation than the other two considered methods (shrinking government consumption or public investment). Their conclusion can be very useful for other countries similar to Slovenia as well: for small open economies the expansionary use of fiscal policy instruments have poor effectiveness and high costs.
In the final paper, Ji Wu, Hosung Lim, and Bang Nam Jeon examine how the monetary transmission mechanism in Korea is influenced by the different lending behavior of domestic and foreign-owned banks during the financial crisis of 2008–2009. The authors find that foreign banks react inversely to monetary policy changes than their domestic counterparts, and in so doing they buffer or hamper the monetary policy transmission mechanism. The authors find differences in this buffering effect between foreign bank branches and subsidiaries, and between branches with parent banks located in the U.S. or in other countries. They report the highest buffering effect for foreign bank branches with U.S. parents. Their results suggest that multinational banks, by establishing internal capital markets and allocating their funds on a global scale across their foreign subsidiaries and branches, also affect the efficacy of monetary policy in the host countries. Their conclusion has important implications for both policy makers and banking regulators especially during crisis periods.
We hope that the articles of this special issue of Emerging Markets Finance & Trade attract attention of both academics and policy-makers and help them to have a better understanding of critical policy issues facing emerging markets. We thank all of those who contributed to the success of the SSEM Euroconference 2014, especially Ali M. Kutan (editor of Emerging Markets Finance & Trade) and Josef C. Brada (President of SSEM) and all authors and presenters who took the time to travel all the way to Hungary.