Working Paper: CEPR ID: DP1548
Authors: Willem H. Buiter; Ricardo Lago; Helene Rey
Abstract: This paper takes a systematic look at the portfolio choice problem faced by investment banks or funds investing in transition economies. We relate the performance of projects in the transition economies to the broader macroeconomic and international environment, which affect the project through its input-output structure and its financial balance sheet. Among the macroeconomic determinants of enterprise behaviour we consider are productivity growth, real wage growth, movements in the international terms of trade, shocks to the relative price of traded and non-traded goods, domestic and foreign interest rates, currency depreciation and the rate of inflation. We evaluate the attractiveness of alternative investment strategies and provisioning rules from the perspective of portfolio theory.
Keywords: transition economies; enterprise performance; portfolio choice; provisioning; macroeconomic environment
JEL Codes: 020; E44; F21; F41; G11; G24; G32; P27
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity growth (O49) | enterprise performance (L25) |
| real wage growth (J39) | enterprise performance (L25) |
| movements in international terms of trade (F14) | enterprise performance (L25) |
| shocks to relative prices (E39) | enterprise profitability (L21) |
| currency depreciation (F31) | enterprise profitability (L21) |
| inflation rates (E31) | enterprise profitability (L21) |
| domestic interest rates (E43) | enterprise profitability (L21) |
| foreign interest rates (E43) | enterprise profitability (L21) |