Contemporary Economics supports GIKA


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Volume 7 Issue 3 (2013)

Fiscal policy within a common currency area – growth implications in the light of neoclassical theory original article

pp. 5-16 | First published in 26 September 2013 | DOI:10.5709/ce.1897-9254.86

Michał Konopczyński


We examine the long-run impact of fiscal policy on economic growth under the conditions of an economic and monetary union (EMU). The analysis is based on the neoclassical growth model of a small (in economic terms) open economy in an EMU. The core assumptions are perfect capital mobility, which results in identical interest rates across the EMU, and perfect mobility of goods, which leads to the convergence of price levels. The model is based on standard neoclassical assumptions, i.e., the output is determined by the Cobb-Douglas production function with a Harrod-neutral technical progress and constant returns to scale, capital and labor receive their marginal products, etc. We show that a unique long-run equilibrium exists and is characterized by the so-called natural rate of growth. The necessary and sufficient conditions of global asymptotic stability form a system of three non-trivial inequalities. We argue that in modern economies, these conditions are satisfied, except perhaps for very short periods of time. Furthermore, we show that the golden rules of fiscal policy have the form of an alternative optimal policy that crucially depends on the relation between the real interest rate and the natural rate of growth and on the relations between five other autonomous parameters.

Keywords: monetary union; golden rule; neoclassical growth theory; fiscal policy

To What Extent Is the Institutional Environment Responsible for Worldwide Differences in Economic Development original article

pp. 17-38 | First published in 26 September 2013 | DOI:10.5709/ce.1897-9254.87

Mariusz Próchniak


This study aims to assess to what extent the institutional environment is responsible for worldwide differences in economic development. To answer this question, a new concept of the institutions-augmented Solow model is constructed. The analysis covers 153 countries and the period 1994-2009. The empirical analysis confirms a large positive impact of the quality of the institutional environment on the level of economic development. This positive link has been evidenced for all six of the employed institutional indicators (although nonlinearities are present in some cases). Our own concept of the institutions-augmented Solow model fits the empirical data very well. It turns out that differences in physical capital, human capital and the institutional environment (which is measured by the governance indicator) explain approximately 75% of the differences in economic development among the countries of the world. According to the institutions-augmented Solow model, the production function that is consistent with the empirical data is Y = K0.372H0.315L0.313Q0.705, where K is the physical capital, H is the human capital, L is the labor and Q represents the institutional indicator.

Keywords: economic development; institutions; economic growth

Roads as Channels of Centrifugal Policy Transfer: A Spatial Interaction Model Revised original article

pp. 39-50 | First published in 26 September 2013 | DOI:10.5709/ce.1897-9254.88

Katarzyna Kopczewska


This paper proposes a methodology for measuring the spatial effects of roads and the seats of local authorities on the diffusion of business activity, which usually follows distance decay patterns from core to periphery. Regional development policies, pursued by regional authorities, directed at local units and designed to support local economies, are implemented by means of a centrifugal diffusion process. This invisible flow of policy is modeled using a one-way spatial interaction model represented by a multinomial distance decay function for the integrated spatial dataset. The research results indicate that NUTS5 (Nomenclature of Territorial Units for Statistics) units (gminas) perform better in terms of saturation with business activity when NUTS4 seats of authority are established there than when they are established near international roads. The natural diffusion process from core cities to the periphery covers approximately 25–30 km, and the presence of international roads extends this range by 20 km. The results confirm the hypothesis of an endogenous growth pattern.

Keywords: spatial spillover; policy transfer; range of local governments; distance decay function

Investor reaction to strategic emphasis on earnings numbers: An empirical study original article

pp. 51-64 | First published in 26 September 2013 | DOI:10.5709/ce.1897-9254.89

M. Shibley Sadique, M. Arifur Rahman


We analyze the earnings information and stock prices of S&P500 firms and find that investors following S&P500 stocks (i) respond more to pro forma earnings than to GAAP earnings, (ii) respond to an emphasis on pro forma earnings, and (iii) are fixated on pro forma earnings. We provide the first direct evidence that a strategic emphasis on earnings numbers may affect return volatility. Further, our results do not support the argument that a larger investor response to Street earnings might be driven by large differences between the Street numbers and GAAP numbers.

Keywords: earnings press release; emphasis on earnings numbers; stock market reaction; functional fixation hypothesis; fourth quarter earnings

International trade and business cycle synchronization in Poland, the European Union and the Euro Zone original article

pp. 65-78 | First published in 26 September 2013 | DOI:10.5709/ce.1897-9254.90

Piotr Misztal


The analysis of business cycle synchronization levels has become a key point in the discussion of the processes of international economic integration. Economists show a particular interest in analyzing the frequency of processes of business cycle convergence and divergence (decoupling) in the European Union, especially in the Euro Zone. One of the factors determining business cycle convergence in economies is the intensity and structure of international trade. The aim of this paper is to analyze the influence exerted by international trade over the synchronization of business cycles in Poland, the European Union and the Euro Zone from 1995 to 2011. The analytical methods employed here encompass a review of the literature on macroeconomics and international finance, as well as econometric models (such as the Vector Autoregression Model). The results of empirical research indicate that an increase in trade turnover does not necessarily lead to greater business cycle synchronization in the economies under analysis. In fact, the impact of an increase in countries’ turnover on the synchronization of their business cycles depends predominantly on the structure of trade turnover and not solely on the intensity of trade.

Keywords: business cycle; international trade; economic integration

The impact of financial globalization and financialization on the economy in the current crisis through banking corporate governance original article

pp. 79-94 | First published in 26 September 2013 | DOI:10.5709/ce.1897-9254.91

Juan Antonio Azkunaga, Leire San-Jose, Sara Urionabarrenetxea


This work analyzes the role of governance of financial entities in the current crisis. Neoliberal economic policies, deregulation and liberalization have characterized financial globalization, giving rise to the financialization of the economy. This paper, using the analysis-synthesis method, shows that the corporate governance of entities has adapted to the new social environment under the influence of the interests of the investors. The results of this paper suggest the need to monitor the over-emphasis on the maximization of short-term shareholder value without relativizing the risk taken to achieve it, as such, the emphasis on short-term shareholder value is considered a crucial contributing factor to the present crisis.

Keywords: corporate governance; banks, globalization; financial crisis; institutional investors.

Bulgarian banking: looking for sustainability original article

pp. 95-114 | First published in 26 September 2013 | DOI:10.5709/ce.1897-9254.92

Garabed Minassian


In this work, we trace and analyze the emergence of the crisis in the Bulgarian banking system as well as the behavior of the central bank and other macroeconomic institutions. The average annual rate of growth in the net profits of the commercial banks for the period 2002-2008 amounted to 31.6%, which encouraged and accounted for the increase in credits. After 2008, the pendulum began to swing back as the difficulties in collecting loan repayments increased, the strain in financial balances tightened and assistance and support from the regulators were requested. The level of the financial and operating income was maintained primarily because of the high interest rates on the loans, but the structure of their distribution shifted substantially. Administrative costs and depreciation were nearly frozen up, and impairment and provisions grew at the expense of profit. This work shows that macroeconomic policies allowed the expansion of the lending boom and encouraged its irrational development. Poor operation and poor quality of the institutions not only allowed but also enabled direction of investments to financing of inefficient production structures. Underestimating the negative consequences shoring up a dysfunctional institutional environment is deemed a form of irrationality; however, not one of the immediate economic players acted to override the economic and political environment. The financial and economic crisis currently affecting the country has its roots in the deficiencies of the domestic macroeconomic policies, and therefore, the efforts toward overcoming these failures should be directed at improved domestic macroeconomic management.

Keywords: commercial banking; central banking; financial crisis

The Earnings Differential between Formal and Informal Employees in Urban China original article

pp. 115-124 | First published in 26 September 2013 | DOI:10.5709/ce.1897-9254.93

Hong Zuo


Few studies in the field of labor economics have analyzed the earnings differential between formal and informal employees in urban China. Due to data limitations, previous studies on this subject have not yielded accurate and widely acceptable results. This study seeks to obtain more accurate results by analyzing the earnings differential based on the conceptual framework of informal employment developed by the 17th International Conference of Labor Statisticians. We analyzed data from the 2006 Chinese General Social Survey, using the Lee model to correct for selection bias and decomposing the earnings differential between formal and informal employees in urban China in terms of the effects of employee characteristics, employment, and working hours. The latter two of these comprise the segmentation effect. We found that only 33% of the observed earnings differential can be explained by employee characteristics; the remaining 67% is attributable to the segmentation effect. The working hours effect narrows the earnings differential. Based on the results of our analysis, we conclude that informal employees in urban China, especially female informal employees, suffer from segmentation and that policies to address segmentation issues are needed.

Keywords: informal employment; earnings differential; segmentation; decomposition