November 2015

Does the Cohesion Policy Decrease Economic Inequalities in the European Union?         
Radmila Jovančević
Tomislav Globan
Vedran Recher

Abstract: This paper examines the impact of the EU Cohesion Policy on the relative development of EU countries as well as on the development of NUTS-2 regions within member states. The main hypothesis is that the Cohesion Fund payments are reducing inequalities between member states, while failing to decrease the regional inequalities within member states in the European Union. The basic conclusion is that Cohesion funds should not be viewed as the only solution for the problem of regional inequalities in the EU, but rather as a complementary policy instrument to national regional policies. However, the problem of creating institutional capacity for the withdrawal of the Cohesion resources remains emphasized, especially in new member states with lower real GDP growth, in order to compete for projects of highest multiplicative effects on the economy. 

Key words: economic and regional inequalities, Cohesion Policy, convergence, European Union, European integration
JEL Classification: D63, O47, R11


The CDS and the Government Bonds Markets During the Last Financial Crisis     
France Križanič
Žan Jan Oplotnik

Abstract: Financial market had developed a special instrument to insure the buyers of bonds. This instrument is so called Credit Default Swap (CDS). The CDS price is a kind of insurance premium that the buyer of CDS pays to the seller of CDS in exchange for compensation of possible loss in operation. Paper analyses causality between CDS price and dynamics of bond yields and influence of macroeconomic factors on it in four selected countries during the last financial crisis. Analysis results show that there is no important macroeconomic variable included in the analysis that preceded the CDS prices connected with German government bonds. Sellers of CDS were apparently aware of the systemic nature of the financial crisis in the euro area. In the case of the United Kingdom, Russia and Slovenia we can observe the unemployment rate as the most important macroeconomic variable that preceded the CDS prices for government bonds.

Key words: Bonds, Yield, CDS, International fi nancial markets, Macroeconomics
JEL Classification: E44, F34, G15


Oil-Price Volatility and Macroeconomic Spillovers in Central and Eastern Europe: evidence from a Multivariate GARCH Model
Scott W. Hegerty      

Abstract: Recent commodity price declines have added to worldwide macroeconomic risk, which has had serious effects on both commodity exporters and manufacturers that use oil and raw materials. These effects have been keenly felt in Central and Eastern Europe—particularly in Russia, but also in European Union member states. This study tests for spillovers among commodity-price and macroeconomic volatility by applying a VAR(1)-MGARCH model to monthly time series for eight CEE countries. Overall, we find that oil prices do indeed have effects throughout the region, as do spillovers among exchange rates, inflation, interest rates, and output, but that they differ from country to country—particularly when different degrees of transition and integration are considered. While oil prices have a limited impact on the currencies
of Russia and Ukraine, they do make a much larger contribution to the two countries’ macroeconomic volatility than do spillovers among the other macroeconomic variables.

Key words: Oil Prices, Volatility, Multivariate GARCH, Spillovers, Central/Eastern Europe
JEL Classification: F36


Implications of De-Industrialization for Poverty and Income-Inequality in Pakistan
Bushra Yasmin
Wajeeha Qamar

Abstract: This study endeavors to identify the dynamic link among growth, inequality and poverty, instigated from deindustrialization, in Pakistan over the time period 1970-2013. The Reduced-form Vector Autoregressive Model (VAR) is applied to estimate the empirical model. According to the results, trade openness has declining (mounting) impact on poverty (income inequality) over the specified time period. Moreover, the industrial sector share in GDP has appeared as a major contributing factor in tackling income inequality and poverty. This implies that the deindustrialization, as an emergent of trade liberalization, neutralizes the policy effect for income distribution and poverty in Pakistan. Besides, the Kuznet’s hypothesis has been proved to be true in case of Pakistan where GDP growth has led to increase in the income inequality. The role of industrial sector growth in tackling poverty and income inequality has emerged as vital but the move towards rapid trade liberalization has placed this sector in more competitive position and the persistent nature of income inequality has subdued the growth effects on poverty. The results underlie very pertinent policy to focus on the sector-specific growth in order to tackle the welfare issues. And a cautious move towards trade liberalization is also suggested.

Key words: Inequality, Poverty, Globalization
JEL Classification: O15, I32, F62