The Impact of Population Ageing on the Czech Economy

The Czech Republic is facing a population ageing phenomenon. In addition, its demographic structure is expected to change dramatically over the next 50 years. We apply a stylised overlapping generation model in order to analyse the potential effects of the expected demographic changes on aggregate economic performance taking into account alternative fiscal policy set-ups. We provide a rough estimate of the amendments necessary on the revenue and expenditure sides in order to keep the current system financially balanced. We also discuss the implications for the development of other economic variables. In particular, we separately simulate future developments in the cases of adjustment in either the contribution rate or the value of public benefit. In addition, we demonstrate that parametric changes, such as an increase in the statutory retirement age, cannot eliminate the impact of the deterioration in the demographic structure on the course of the economy.Population ageing, public pension systems, social security.

Survey on Wage and Price Formation of Czech Firms

Using an ad-hoc survey at the firm level, we investigate the determinants of wage and price-setting practices in Czech firms, the presence and sources of wage rigidity, and reactions of firms to hypothetical shocks. Although the evidence of downward wage rigidity is not widespread, we find particular relevance of efficiency wage models for wage rigidity, while implicit contract theory is relevant in firms employing mainly highskilled labour. The survey further suggests that prices are less rigid than wages, while the link between wage and price changes is weak. As a response to unanticipated shocks such as a demand drop, an increase in the cost of an intermediate input or a wage increase, firms mainly reduce costs by reducing non-labour costs and temporary employment.Downward wage rigidity, price setting, survey data, wage setting.

Sustainable Real Exchange Rates in the New EU Member States: What Did the Great Recession Change?

The Great Recession affected export and import patterns in our sample of new EU member countries, and these changes, coupled with a more volatile external environment, have a profound impact on our estimates of real exchange rate misalignments and projections of sustainable real exchange rates. We find that real misalignments in several countries with pegged exchange rates and excessive external liabilities widened relative to earlier estimates. While countries with balanced net trade positions may experience sustainable appreciation during 2010-2014, several currencies are likely to require real depreciation to maintain sustainable net external debt.Foreign direct investment, Great Recession, new EU member states, sustainable exchange rates.

A Gravity Approach to Modelling International Trade in South-Eastern Europe and the Commonwealth of Independent States: The Role of Geography, Policy and Institutions

Since the beginning of market reforms in 1989, the countries of South-Eastern Europe (SEE) and the Commonwealth of Independent States (CIS) have been trading significantly less with the world economy than those Central and Eastern European (CEE) countries which later joined the EU. To explain why this is the case, a number of hypotheses have been proposed in the literature. The key novelty of our study consists in a simultaneous assessment of the contribution to trade of geographical, policy and institutional factors during the EU pre-accession period (1997-–2004). An augmented gravity model is proposed and estimated for a reference group of 82 countries, employing the Poisson and Tobit estimation techniques. We find that low quality of economic institutions in the SEE and CIS countries accounted for a considerable proportion of their below-potential international trade. We perform policy simulations using institutional data up to 2008 to identify channels for increasing the international trade of the SEE and CIS countries.Gravity model of trade, Poisson estimator, Tobit estimator, transition economies.

Financial Integration at Times of Financial Instability

This article analyzes the phenomenon of financial integration on both the theoretical and empirical levels, focusing primarily on assessing the impacts of the current financial crisis. In the theoretical section we first look at the definition of financial integration and summarize the benefits and costs associated with this process. We go on to examine the relationship between financial integration and financial instability, emphasizing the priority role of financial innovation. The subsequent empirical section provides an analysis of the speed and level of integration of the Czech financial market and the markets of selected inflation-targeting Central European economies (Hungary and Poland) and advanced Western European economies (Sweden and the United Kingdom) with the euro area. The results for the Czech Republic reveal that a process of increasing financial integration has been going on steadily since the end of the 1990s and also that the financial crisis caused only temporary price divergence of the Czech financial market from the euro area market.Beta-convergence, financial crisis, financial integration, gamma-convergence, new EU Member States, propagation of shocks, sigma-convergence.

Firm-Level Labour Demand: Adjustment in Good Times and During the Crisis

Using a large panel of Czech manufacturing firms with 50 or more employees, we update the firm-level labour demand elasticity estimates for 2002-2009. The economic crisis of 2008-2009 provides a source of variation needed for getting estimates that cover not only times of growth, but also a period of economic contraction. We find that in normal times (until 2007), the short-term elasticity is -0.53 with respect to wages and 0.43 with respect to sales, while the long-term elasticities are close to or below unity, standing at -0.94 for wages and 0.76 for sales. Both the wage and sales elasticities increased during the crisis, suggesting that firms became demand constrained, but only the sales elasticity is significantly different. The long-term wage elasticity close to -1 in the period before and during the crisis suggests that firms' employment decisions are made within fixed budgets. Finally, we find that the inclusion of workers hired through temporary work agencies does not significantly affect the results, indicating that firms take into account total labour when deciding on employment and that hired workers are used as an equal labour demand channel with lower adjustment costs. As a robustness check, our results are qualitatively comparable with the narrative evidence from an ad-hoc firm-level survey on wage and price formation conducted in 2007 and 2009 within the ESCB Wage Dynamics Network.Czech Republic, elasticity, firm-level data, labour demand, sales elasticity, wage elasticity, the crisis of 2008-2009.

Structural Reforms and Growth in Transition: A Meta-Analysis

The present fiscal difficulties of many countries amplify the call for structural reforms. To provide stylized facts on how reforms worked in the past, we quantitatively review 60 studies estimating the relation between reforms and growth. These studies examine structural reforms carried out in 26 transition countries around the world. Our results show that an average reform caused substantial costs in the short run, but had strong positive effects on long-run growth. Reforms focused on external liberalization proved to be more beneficial than others in both the short and long run. The findings hold even after correction for publication bias and misspecifications present in some primary studies.http://deepblue.lib.umich.edu/bitstream/2027.42/133076/1/wp1057.pd

Early Warning Indicators of Economic Crises: Evidence from a Panel of 40 Developed Countries

Using a panel of 40 EU and OECD countries for the period 1970-2010 we construct an early warning system. The system consists of a discrete and a continuous model. In the discrete model, we collect an extensive database of various types of economic crises called CDEC 40-40 and examine potential leading indicators. In the continuous model, we construct an index of real crisis incidence as the response variable. We determine the optimal lead employing panel vector autoregression for each potential indicator, and then select useful indicators employing Bayesian model averaging. We re-estimate the resulting specification by system GMM and, to allow for country heterogeneity, additionally evaluate the random coefficients estimator and divide countries into clusters. Our results suggest that global variables are among the most useful early warning indicators. In addition, housing prices emerge consistently as an important source of risk. Finally, we simulate the past effectiveness of several policy instruments and conclude that some central bank tools (for example, reserves) could be useful in mitigating crisis incidence.Bayesian model averaging, dynamic panel, early warning indicators, macroprudential policies, panel VAR.

The Margins of Labour Cost Adjustment: Survey Evidence from European Firms

Firms have multiple options at the time of adjusting their wage bills. However, previous literature has mainly focused on base wages. We broaden the analysis beyond downward rigidity in base wages by investigating the use of other margins of labour cost adjustment at the firm level. Using data from a unique survey, we find that European firms make frequent use of other, more flexible, components of compensation to adjust the cost of labour. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by firm and worker characteristics.European Union, firm survey, labour costs, wage rigidity.

Downward nominal and real wage rigidity : survey evidence from European firms

It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer. This paper presents new evidence from a unique survey of firms across Europe on the prevalence of downward wage rigidity in both real and nominal terms. The authors analyse which firm-level and institutional factors are associated with wage rigidity. The results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models (e.g. efficiency wage theory, insider-outsider theory). The analysis also finds that wage rigidity depends on the labour market institutional environment. Collective bargaining coverage is positively related with downward real wage rigidity, measured on the basis of wage indexation. Downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations.Labor Policies,Environmental Economics&Policies,Labor Markets,Income,Markets and Market Access