O52 - Economywide Country Studies: EuropeReturn

This study estimates the impact of public debt on public investment in Central and Eastern European (CEE) economies. We implement Cross-sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) model, which effectively handles cross-sectional dependence and slope heterogeneity, while dealing with short- and long-run coefficients simultaneously. The results indicate the existence of both short- and long-term crowding out effects of public debt on public investment in the CEE region. These findings have significant fiscal policy repercussions, particularly in context marked by constrained financial resources and substantial debt loads, as has been the case in a number of CEE economies.

Government debt has increased not only in times of economic stress, but it has become a com- mon manifestation of government expenditure funding. The aim of the paper is to inspect the effect of government debt on economic freedom in ten CEE countries between 1995 and 2020 using a panel model approach. Selected quantitative and qualitative variables were examined to validate the hypothesis, including public governance indicators, besides the economic ones. Based on a robust panel setting, we conclude that government debt has a negative impact on economic freedom. A causality from government debt to economic freedom is detected to- gether with a long-term equilibrium relationship between them, with both a long-run and a short-run negative impact of debt on economic freedom. For the considered countries, the gross debt impacts economic freedom and not vice-versa.

In this article we analyse the impact of the interaction between cross-border mergers and acquisitions and the quality of the institutional setting on domestic investment using panel data for 22 European transition countries from 2000 to 2014. We investigate whether the progress and durability of institutional reforms have a crucial influence on the economic performance of cross-border mergers and acquisitions in transition countries. Our empirical findings indicate that contemporaneous cross-border mergers and acquisitions have a crowding-out effect on domestic investment in the year of merger or acquisition, but the influence of their lagged level has a strong crowding-in effect one year later. We find that the overall quality of the institutional setting and the rule of law negatively and significantly affect the relation between this type of foreign direct investment and domestic investment, both in the short and long run. Political stability exhibits a positive and significant impact on domestic investment in the current period and over time.

Many economic analyses use employer-employee data to compare wage and productivity differentials across demographic groups. We apply this approach to assess the importance of 'organizational' workers, i.e., managing and marketing personnel. The estimates based on 2000-2006 Czech worker-level data augmented with company balance sheet information suggest that these workers are important for company performance and that they are fairly rewarded for their relative productivity in terms of their relative pay. Foreign-owned companies feature higher shares of such workers who are more productive in these firms (relative to other employees) compared to domestically owned companies.

This paper suggests that real GDP is not an appropriate indicator for long-term comparisons of the performance of transformation and post-transformation economies either with developed economies, or one with another, or across different phases of development of a single economy. We analyse the possible reasons why real GDP diverges from the theoretical concept of the objective level of value added adjusted for inflation. These reasons concern real exchange rate appreciation and overestimation of inflation due to quality changes in output after the collapse of central planning. To overcome the shortcomings of real GDP in explaining the true "transformation story" we develop the concept of "comparable" real GDP. This concept is calculated from nominal GDP, the exchange rate against the euro, and inflation in the euro area. While the differences between "standard" real GDP and "comparable" real GDP are modest and temporary in advanced economies, they are quantitatively and qualitatively significant and persistent in transformation and post-transformation economies. On the basis of the relevant literature we introduce two modifications of "comparable" real GDP. They account for likely differences in productivity patterns between tradables and non-tradables and between the performance of the export and non-export segments of the economy respectively. We conclude that true convergence is proceeding at a significantly higher pace than real GDP implies and that the Czech economy is converging to the euro area somewhat faster than the Polish economy and much faster than the Hungarian economy.

This paper examines the exchange rate pass-through to import, producer and consumer prices in South Africa using monthly data covering the period 2000M1 to 2009M5. The study uses innovation accounting tools (impulse response and variance decomposition) within the framework of an unrestricted VAR to examine the degree of pass-through as well as the relative importance of a number of variables in explaining changes in domestic prices. The key findings suggest that after 1 per cent shock to nominal effective exchange rate, the level of CPI increases by 0.125 per cent, giving a pass-through elasticity of 13 per cent. However, the pass-through elasticity of producer price is 20 per cent after 24 months suggesting that favourable shocks to producer price inflation can have considerable moderating effect on CPI inflation.

The demand for real M2 in the Czech Republic is positively influenced by real output and negatively associated with the deposit rate, the koruna/euro exchange rate, and the euro interest rate. The coefficient of real output for the demand for real M1 is insignificant. Hence, depreciation of the koruna or a higher euro interest rate would help raise Czech real output. The Box-Cox transformation test shows that the log-linear form for real M1 and M2 demand cannot be rejected at the 5% level while the linear form for real M1 and M2 demand can be rejected at the 5% level. The CUSUM and CUSUMSQ tests show that parameters in the demand for both real M1 and M2 demand are stable. In comparison, real M2 is a better monetary aggregate.

In 2004, the Czech economy continued in solid growth. Slight acceleration of economic growth was driven in particular by strong investment demand and improving performance of the foreign trade with goods. On the other hand, due to slowdown in real wages, consumer demand weakened. 2004 was the year of turnover in foreign trade which has reported the best results since 1994. The EU entry was an important factor behind the improvement of trade balance - the foreign trade exchange significantly accelerated after the EU accession. The EU entry opened new chances to the exporters, especially small and medium-sized companies could fully use the advantage of the Single Market. With the trade balance improving, the reason for permanently high current account deficit is the growing deficit of income balance as a consequence of strong FDI inflow. January and May changes in the Value Added Tax brought a temporary speed-up of consumer prices. After the absorption of this increase, since the last quarter of 2004, headline inflation has been declining. Similar to previous years, inflation fell under the CNB target corridor. Record high world prices of oil and metals caused a strong increase of industrial producer prices, however, strong competition between both producers and traders has prevented the spillover to consumer prices.

Based on a general equilibrium model, this study finds that real output in Estonia is positively associated with real quantity of money and negatively influenced by real depreciation of the kroon, real stock prices, and the expected inflation rate. Government deficit spending is found to be insignificant. Policy implications are that fiscal discipline pursued by the Estonian government is appropriate, that a stronger currency may better serve Estonia, and that the wealth effect of an increase in the stock price on real money balances is greater than the substitution effect.

In 2003, the economic growth moderately accelerated. The main factor of this acceleration was massive household consumption accompanied by the revival of fixed capital formation. Gradual narrowing of the gap between consumer and investment demand was one of major achievements of 2003, supporting the long-term sustainability of Czech economic growth. In 2003, both imports and exports accelerated, the trade deficit remaining at the same level as in 2002. Considering acceleration of Czech economic growth in 2003, stagnating level of trade deficit is favourable. The reason for continuously high current account deficit is growing deficit of income balance and declining surplus of service balance. The deficit of the current account in the last two years was not provoked by growing imports (as in the nineties), but has been predominantly the price for the massive foreign direct investment inflows in the past decade.

Gross domestic product continued to grow in 2002, faster than in the economies of most of the Czech Republic's major partners, albeit at a slower pace than in 2001. The major driving force of economic growth was private consumption, followed by government consumption. Investment demand registered a slowdown as an indirect result of weak foreign demand. 2002 was the year of record-low inflation in the history of the Czech Republic - at the end of the year, the consumer price index stood at 0.6 %. During 2002, nominal appreciation of the Czech currency accelerated - the koruna appreciated against the euro by almost ten per cent. The labor market was severely hit by the general economic slowdown and the unemployment rate anew reached the record-high level at the end of the year.

This paper evaluates Czech economic development during 2001 and is supplemented by the predictions of basic economic indicators for 2002 and 2003. This article is divided in several parts. In the beginning we focus on economic growth, including a marginal analysis of GDP and industrial production. It is possible to find a detailed net inflation analysis in Chapter three which consists of an explanation of current demand and supply factors and then we present an econometric estimate of the net inflation equation. This chapter includes impulse-response analysis. Raw material dependency and the intensity of Czech production is analyzed in Chapter four, including an econometric estimate of oil and gas prices. In the following chapter - Labour Market - we focus on gross nominal wage determinants in the Czech Republic. In the last two chapters we evaluate fiscal and monetary policy, including an detailed interest rate analysis.

The aim and probably the biggest contribution of this paper is to produce unique data series for the capital stock and an estimate of the depreciation rate (using microeconomic data) in the transitive economies in the period 1989 - 1999 and subsequently to try to calculate the growth accounting formula. The countries of primary interest are the Czech Republic and Slovakia, where the most complete data sources are available. The paper will prove that in the first years of economic transition Central and Eastern European countries show extremely high dynamics of growth that can be attributed to increases in productivity, that is very high Solow residual.

Domestic demand, especially private household consumption and fixed capital investment was the main engine of continuing economic growth. At the same time, strong domestic demand did not provoke regular inflationary pressures. Inflation has stopped to be a threat of macroeconomic stability since the last quarter of 2001. Therefore, the Czech monetary policy could follow the overall world trend in basic rate cuts, the appreciating Czech currency being, however, very reluctant to monetary policy steps. The slowdown in Western Europe was felt predominantly in the Czech industry, which was very sensitive especially to the decline of demand for Czech industrial exports to Germany. The scope of external imbalance was approximately the same as in previous year - low level of import prices helped to offset the negative impact of weakening foreign demand. The current account deficit was comfortably offset by ongoing inflow of FDI.