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The advent of the European Union has decreased the diversification benefits available from country based equity market indices in the region. This paper measures the increase in stock integration between the three largest new EU members (Hungary, the Czech Republic and Poland who joined in May 2004) and the Euro-zone. We allow for a potentially gradual change in correlation between stock markets, which seems particularly appropriate to analyse the increasing integration between the Eastern European and the Euro-zone stock markets over the recent years. At the country market index level all three Eastern European markets show a considerable increase in correlations in 2006. At the industry level the dates and transition periods for the correlations differ, and the correlations are lower although also increasing. The results show that sectoral indices in Eastern European markets may provide larger diversification opportunities than the aggregate market.

AbstractThis paper tests the conjecture that easy money policies of central banks, that is setting low rates for long, are responsible for the excess risk‐taking behavior that led to the global financial crisis. If the conjecture holds then policy rate shocks should have persistent effects on bank behavior either through the bank lending or the risk‐taking channel. Using data for the period prior to the global financial crisis, and a shock persistence methodology, we find that the policy rate has only limited idiosyncratic effects on bank lending growth and no effect on credit risk.

In the aftermath of the European sovereign debt crisis (2009-2014), the management of expectations has risen in importance. However, policy responses have emphasized the management of fiscal spending without examining the impact changes in the business confidence have on the economy. This paper uses a Factor-Augmented Vector Autoregressive specification, which allows for a larger information set covering both domestic and international developments, to measure the responses of five Euro Area economies to a one percent shock in government consumption and business confidence. The evidence suggests that even though the response to a government consumption shock is strong, a shock in expectations has an even greater effect. This points out to the fact that perceptions about the future and trust in the policymaker are much more important than previously considered. Thus, especially in (but not limited to) times of turbulence, or during efforts of stabilization and/or structural reforms, more emphasis should be placed on the overall credibility of the decisions, which could help to mitigate any potential adverse effects from the policies.