Dept 37 - Economic Policy
Dept 37 - Economic Policy


Updated 17-9-2015 4:00 PM
  • Financial Policy Department has prepared working paper on Fiscal Procyclicality in Resource-Rich Countries
  • Extended DSGE Model of the Czech Economy
  • Implementation of EU Funds in the 2007-2013 Programming Period
  • Redesing of the presentation page
  • Cyclical adjustment of the government balance
  • 2015 Pension Projections Update

Ministry’s The Financial Policies department is responsible for macroeconomic and fiscal analysis, predictions and other related documents focused on fiscal policy. With an aspiration to inform the public about its work and due to a need for discussion of key issues in the responsible fields, the department has decided to enlarge its research studies series. From now on they will be classified in two series as follows:

  • Working papers series focuses on research projects done at the department in the field of economic and fiscal policy.
  • Information papers series presents certain issues of macroeconomic and economic policies.

The papers are published in Czech or English (with a bilingual abstract) in an electronic form on the website of the Ministry, there is no print edition available.

Working papers

Working papers series focuses on research projects done at the department in the field of economic and fiscal policy.

In the paper we present a New-Keynesian small open-economy dynamic stochastic general equilibrium model. It consists of four main building blocks: households, firms, government (fiscal and monetary authorities) and the foreign economy. The model is designed to suit the requirements of the Ministry of Finance of the Czech Republic on macroeconomic and fiscal policy analysis. The paper builds on previous versions of the model -- a rather general first version and extension of fiscal policy block -- and brings two important additional extensions. First, previously modelled net exports are split into two -- exports and imports. Second, the model explicitly specifies investments as a separate part of the domestic demand. Therefore we included physical capital and capital services into the model. We believe that these extensions will be useful for in-depth analysis of various macroeconomic events as well as intended fiscal policy measures including their impacts on the Czech economy.

Ilkin Aliyev, Božena Bobková, Zbyněk Štork

This study analyzes fiscal policy procyclicality in resource-rich countries. A strong U-shaped relationship between the procyclicality of government capital expenditures and the resource richness measure comprised of the mineral exports share in total merchandise exports is obtained for developing countries. Such a relationship is robust to different methodologies and various checks. Two hypotheses have been considered: first, the political economy hypothesis, and second, the borrowing constraints hypothesis. Empirical observations appear to be consistent with the hypotheses. A model has been built that is able to generate a U-shape effect combining politoval economy and borrowing constraint hypotheses. Arguably, with a model of simple settings such a Ushape relationship can be obtained and interpreted.

Ilkin Aliyev

This paper reviews two approaches to short-term forecasting of macroeconomic variables. First, it outlines the methodology for constructing nonmodel based composite leading indicators that are used for predicting turning points in the business cycle. Second, it discusses time series models often employed to forecast actual values of macroeconomic variables. Composite leading indicators with 6 months, 5 months, 4 months, and 3 months respective leads are presented. The presence of variables related to the external environment, especially Germany, in these indices confirm the hypothesis that these variables should be useful for tracking the Czech business cycle. A parsimonious specification of a single equation model is able to produce satisfactory 1-quarter-ahead forecasts of quarterly real GDP growth in the Czech Republic. To address the variable selection problem and the multicollinearity problem inherent in single equation models with observed variables, principal components are used to estimate a few latent factors in the spirit of Dynamic Factor Models. The results show that this approach is also useful in predicting quarterly real GDP growth 1-quarter-ahead, although it fails to predict the turbulent dynamics in the first half of 2009.

Pavel Svatoň

The main objective of the thesis is to analyse tax expenditures in the tax system of the Czech Republic. More specifically to identify tax expenditures in legislation setting down personal income tax, corporate income tax and value added tax in 2008 and quantify their impact to tax revenues. The work starts with the review of the literature in this field. There is a rich academic literature dealing with various aspects of tax expenditure analysis starting with their identification and quantification and continuing to distributional analysis or analysis of compliance costs. Most if the literature originates in the United States where a substantial amount of papers deals with the critique of official tax expenditure reports or with suggestions how to improve it. Similar topics are absent in the literature in other countries. Another source are the official tax expenditure reports published in several countries. The conclusion can be drawn that there are no internationally accepted standards of tax expenditures analysis. Another conclusion deals with the term tax expenditure itself. It was conceived in the United States in the 1960's to express that many tax reliefs are in fact direct expenditures hidden in the tax system. However sometimes provisions which are not analogical to direct expenditures are called tax expenditures as well. That's why the term tax expenditure is avoided in this thesis. Instead a more general term tax relief is used. Tax expenditures thus represent a subset of tax reliefs. Tax reliefs are defined as provisions of the tax law which represent lower tax liability or deferral of the tax liability for the tax payer. Tax reliefs are identified by their form, i.e. tax exemptions, reduced rates, tax credits etc. Features which represent an integral part of the tax system (e.g. deduction of input VAT) are not identified as a tax relief. This assures that the full list is created. Then the normative analysis is used to identify main rationale for each tax reliefs, i.e. tax reliefs which have been introduced in order to support other public policies' targets (genuine tax expenditures), tax relief which have been introduced in order to increase tax system effectiveness mainly by reducing the compliance costs and finally tax reliefs which share attribute of both aforementioned group. Based on this, there have been identified 210 tax reliefs (PIT: 119, CIT: 62, VAT: 29). From the point of view of further analysis, the most important part represent the genuine tax expenditures. Methods to quantify the identified tax reliefs were devised based on data available. There was dentified 57 tax expenditures out of all 210 tax reliefs with total amount of CZK 120 bn. It is important to bear in mind however that the simple addition of tax reliefs is not methodologically correct since abolition of several tax reliefs has different impact on tax revenues than addition of individually quantified impacts. The main contribution of the thesis consists in setting up a complete list of the tax reliefs in the tax system of the Czech Republic for the taxes with the highest revenues. This will enable to prepare such an analysis on a regular basis, to include other taxes and to improve the methods used. The stakeholders in the field of public finance policy and tax policy will thus have more information available to design more effective policies. Further research dealing with other aspects of selected tax expenditures such as their distributional impacts can draw from this thesis as well.

Martin Jareš

In the paper we extend a simple DSGE model of the Czech economy called HUBERT in order to allow for analysis of various fiscal policy measures. Model describes behaviour of four agents in the economy: households, firms, government and world. Here we focus mainly on extensions of blocks of households and government, which includes distinction of Ricardian and Rule-of-Thumb households and endogenous tax rates. We prefer to have a simple model, so we work with aggregated variables: taxes on consumption, taxes on wages, government consumption and benefits to households. Shocks are introduced into the model using implicit tax rates. We also provide a discussion of results in the paper. Sensitivity analysis asses (i) stability of the model regarding the share of non-Ricardian households and (ii) effects of non-accommodating policy of Central Bank on fiscal measures. We add a discussion of economic impacts of different fiscal measures that aim at additional gain of certain funds for the state budget.

Zbyněk Štork, Jana Závacká

In the paper we present a simple DSGE model of the Czech economy called HUBERT. The model describes the behaviour of four basic agents in the economy: households, firms, government, and world. Although HUBERT is rather a simple version of standard DSGE models, it incorporates standard features of New Keynesian economics such as imperfect competition, habit formation of households, nominal and real rigidities. A current version of the model is intended both for policy analysis simulations and regular forecasts at the Ministry of Finance. From preliminary results follow that the model produce reasonable outputs.

Zbyněk Štork, Jana Závacká, Marián Vávra

The Czech Republic has implemented two extensive reforms of tax and benefit systems in 2007 – 2008. The presented study analyses their impact on work motivation using the concept of “work motivation indicators”. The study discusses two approaches towards use of these indicators: calculations for model households and micro simulation. Analytical part of the study utilises both approaches. Results of the carried calculations confirm a more important impact of the 2007 reform of benefits. Impact of the 2008 reform, on the other hand, has been from the perspective of the followed indicators very limited. Nevertheless, the total variation in the followed indicators has been in both years very small and therefore no significant increase in the flexibility of the labour market’s supply side can be expected.

Jan Pavel

The submitted study considers the real convergence problems. Mainly in an empirical way, we study the reducing of economic divergence between countries. In the first part the definition and the measurement of real convergence is presented. The second chapter focuses on analysis of different available data and contributes to a search of factors which determines the real convergence. Our major purpose is to conduce to a discussion on this topic which is currently held in some professional institutions.

Gabriela Smrčková, Ivan Vlček, František Cvengroš

The paper presents a theoretical discussion with the aim to provide an exposition and comparison of the concepts of the NAIRU and the natural rate of unemployment based on the study of the original sources. Both concepts play an important role in assessing the nature of unemployment and cyclical position of the economy. Thus, the paper focuses on the concepts within the framework of economic equilibrium. The second target is to examine the concepts with respect to the problem of empirical estimation. If relevant econometric methods are to be used to estimate the NAIRU or the natural rate of unemployment, the knowledge of the theoretical background is necessary.

Vít Pošta

The paper deals with NAIRU modelling in the context of the Czech economy. There are two methods used in the paper. The first one, developed by OECD, and recommended by the European Commission for NAIRU modelling in the new Member States, represents the basis of the structural models approach. The second one, a dominating method, builds on the Gordon triangle model and the NAIRU itself is modelled as an autoregressive process. Kalman filtering procedure is used to solve the model.

Vít Pošta

The study focuses on the remarkable growth of employment of foreigners in the CR since joining the EU and its impact on the labour market. Reviewed were available data sources, status and employment possibilities of foreigners, their structure and regional distribution and a possibility of negative influence on the Czech labour market. Neither crowding-out of domestic workers nor verifiable negative impacts on the wage development were identified. Based on the available sources it has been established that the growth of foreign employment is rather of a cyclical character and foreigners accept jobs that are either specialised or not taken up by Czech labour force due to its permanently lower adaptability and mobility.

Jan Pavel, Vlasta Turková

The study is focused on the process of convergence in five Central European countries which became EU Member States (EU-5) in May 2004. The first chapter examines economic growth and the progress in real convergence. Real growth of GDP strongly accelerated in the years 2004-2006 in most countries. This acceleration is linked with the entry to the EU and may be attributable to many factors, particularly to foreign direct investment. On the supply side the contribution of total factor productivity has become decisive and on the demand side beside domestic demand positive role played the foreign trade. Alternative indicators, namely the gross national income and real gross domestic income, were used to assess the significance of primary incomes outflow and terms of trade changes for the countries concerned. In this respect rather large differences among countries persist. The catching-up process to the average level of EU countries has also accelerated. Second part examines the issue of nominal convergence, i.e. convergence of prices, wages and other nominal indicators. Then, it presents a macroeconomic view on the nominal (price) convergence and the main determinants of this process are discussed. The analysis shows that there are some commodity groups with the price level close to the German level, while others still have very low levels (especially individual and government services). This could result in generating potential increase in price level after euro adoption. Very similar situation is the wage level in the EU-5 Countries. Therefore, it might be short sighted to rely only on the cost competitiveness which is bound to phase out in several years. This study also discusses potential pitfalls concerning nominal and real convergence. The third chapter shows some structural aspects of sustainable convergence which necessitate greater attention of economic policy. Keeping macroeconomic stability of Central European countries in acceptable boundaries represents a serious problem. Positive tendency can be seen in foreign trade balance. Current account balance looks less favourable due to negative balance of incomes expressing bigger outflow of primary incomes in relation to their inflow. Public finance can be identified as the weakest chain link of macroeconomic balance. However, the macroeconomic stability indicators reveal substantial differences among countries. Then, it assess balance of payments in greater detail, in particular the role of foreign direct investment (FDI) in the Czech economy and its consequences. The growth of profitability of FDI together with increasing tendency from reinvestments to repatriations of profits has led to rapid growth of expenditures of the balance of incomes. This leads to increasing pressure on the current account, creating notable risky factor for the external balance for the future. Following text is focused on the analysis of the penetration of the foreign controlled companies in domestic economy. Special attendance is devoted to the size and developments of the duality in the Czech economy, in particular in its key segment – manufacturing industry. The results indicate gradual and differentiated diminishing of the scope of duality in the Czech manufacturing. Then, the position of the Czech Republic is evaluated within a comprehensive assessment framework of knowledge-based economy as designed by the World Bank (Knowledge Assessment Matrix). The assessment includes the key indicators of economic performance and institutional quality (as enabling factors) and the knowledge pillars, i.e. innovation performance and human resource quality, and information and communication technology infrastructure. The final part is devoted to the structural aspects of development. As to the industry level, the economic performance (productivity level and its dynamics in time) has been evaluated in terms of diverse technology and knowledge intensities. Industry based perspective has been also projected in the comprehensive overview of innovation performance of Czech enterprises. In the end, the disaggregated view is employed to look at development of regions. The analysis includes the economic performance in the lights of preconditions and outcome of competitiveness. The study was examined during a seminar organised by the Ministry of Finance, which took place in June 5 – 6, 2007 in Smilovice.

Anna Kadeřábková et al.

The aim of hereby submitted study is to assess the position of the Czech Republic (CR) compared to other EU Member States in the process of globalisation of knowledge-based factors, i.e. foreign direct investment into quality-intensive activities and qualified labour force. Emphasis is put notably on the position of the CR compared to other new Member States. The aim of this study was to provide background information for those who would represent the CR in the Globalisation Working Group (GWG), which operated in the period 2005 – 2006 as a working body of the EU Economic Policy Committee. The author represented the CR in this working group during 2006. The first part of this study describes initial conditions, notably FDI flows and international migration of qualified workers. The second part deals with international division of labour and is based on GWG projections. For the EU as a whole these projections predict a gradual diversion from less qualification and technology-intensive sectors. A similar trend is expected in the CR. With regard to initial conditions it is however expected to be stronger than in the old Member States. Simultaneously, demand for highly qualified labour force will increase. The next section covers FDI inflow, which in case of new Member States, notably in the Central European region, is relatively strong. Foreign investors appraise positively the potential of the CR as concerns investments into R&D and knowledge-intensive activities. A low supply of workers with adequate qualification is the most important risk factor. The fourth part deals with economic migration. So far, the share of foreigners on total population in the CR is relatively low compared to other EU countries. As concerns foreigners working in the CR, workers from Slovakia and Ukraine dominate on local labour market. Their professional structure is however unfavourable – workers with low qualification prevail. In its concluding parts the study summarises economic policy recommendations both at the Community level and at the level of individual countries, which should help to improve the structure of FDI, increase labour force mobility and achieve betted educational structure of citizens. The study was examined during a seminar organised by the Ministry of Finance, which took place in December 4 – 6, 2006 in Smilovice.

Anna Kadeřábková

This study deals with the pension system of the Czech Republic and sheds light on the approach of the Czech Ministry of Finance to projecting future pension expenditures. The first part summarises key features of the Czech pension system embedded in the present legislation; it describes all types of pension benefits granted under the provisions of the Pension Insurance Act: old age pension, disability pensions (full and partial disability pension) and survivor’s pensions (widow’s/widower’s and orphan’s). Second part of the paper presents the pension model that has been built and used by the Ministry of Finance of the Czech Republic to make long-term projections of spending on all the different pension benefits. This model consists of three main building blocks. The first block calculates the number of pensions on the basis of a probabilistic approach. The second block computes the level of new pension benefits using the pension formulae, stipulated by the Pension Insurance Act. The third block combines the information from the previous two blocks, which allows to calculate an average pension benefit and spending on all pension benefits in the projection horizon. The study also contains charts with some of the most important projection results. The creation of this study was motivated by participation of Czech delegates in the Ageing Working Group (AWG) attached to the EPC under European Council. The study and results of the model were examined by the AWG on October 17, 2005.

Aleš Krejdl, Zbyněk Štork

The processed exploratory study reacts on existing structural problems on the Czech labour market, which are caused by de-motivating impact of interaction between taxes and benefits. Using models of marginal effective tax rates developed by the OECD and data from Mikrocensus 2002, this paper discusses the influence of wage taxation, social security contributions and the benefit system on taxpayers´ incomes and therefore on the motivation to work. The first part describes indicators for measuring taxation of labour, analyses the methodology of measuring marginal effective tax rates and shows the calculated results. The next part discuses the influence of these effective tax rates and benefit systems on the taxpayers’ net incomes and analyses possibilities of poverty traps for households, especially for low-wage taxpayers. The results show that efforts to reduce poverty hardly reduced work incentives in the Czech Republic and Slovakia.

Jan Pavel

A new method of estimation of inflation expectations based on probability approach developed by Carlson and Parkin in 1975 is presented in this paper. There are three basic reasons of our interest in this topic. The first one is a quite long history of business survey data in the Czech Republic that have not been, however, fully used for the purposes of macroeconomic analysis or forecasts so far. The second reason is that the mentioned method can convert, with some limitations, the raw business survey data (in a form of balances) into the quantitative data comparable with the reference series (e.g. inflation rate, industrial production growth, etc.). The third one is that this probability approach has not been published in the Czech economic literature so far.

Marián Vávra


Information papers

Information papers series presents certain issues of macroeconomic and fiscal policies.

The Financial policy department has prepared the information paper relating to the update of the pension expenditures projection. These projections are based on the demographic and macroeconomic assumptions provided by the European Commission and Eurostat. The projections cover the horizon from 2013 up to 2060. The paper contains not only the development of the pension expenditures as a whole but also the decomposition of the underlying effects involved. Last but not least, there can be found the comparison with previous projection rounds, which reflect not only the change in assumptions but the effect of the reforms made over time as well. Detailed explanations as well as pension model specification are enclosed in Annexes.

Jindřich Marval, Zbyněk Štork

The aim of the paper is to evaluate different methods of the estimation of output gap and of the calculation of cyclically adjusted government balance. Methods used by the Ministry of Finance of the Czech Republic, the European Commission and the Organisation for Economic Co-operation and Development are compared with other approaches.

Lukáš Lang, Jan Mareš

The aim of this paper is to evaluate the distribution of support financed from the Economic and Social Cohesion Policy, according to knowledge of detailed information on the structure of supported projects and types of beneficiaries. Also analysed are the differences between individual operational programmes, based on the size characteristics of supported projects and their various purposes with respect to their beneficiaries.

Petr Hovorka, Jan Kůs

The Financial policy department has prepared the information paper relating to the update of the pension expenditures projection. These projections are based on the demographic and macroeconomic assumptions provided by the European Commission and Eurostat. The projections cover the horizon from 2010 up to 2060. The paper contains not only the development of the pension expenditures as a whole but also the decomposition of the underlying effects involved. Last but not least, there can be found the comparison with previous projection rounds, which reflect not only the change in assumptions but the effect of the reforms made over time as well.

Jindřich Marval, Zbyněk Štork

Growth accounting helps to distinguish, to what extent do the quantitative and qualitative sources contribute to economic growth, since it decomposes gross domestic product per capita to the individual components (labour productivity, demographic component, hours worked per employee, share of employed persons in the labour force and rate of participation) and enables a deeper analysis of the sources of economic growth and illustrates the relationship between growth factors on one side and economic policy on the other one. The study compares and evaluates the components of economic growth for selected EU catching-up economies, paying particular attention to the Czech Republic. Although the sources of economic growth across particular countries may significantly differ, there can be found several links. Unlike the labour productivity achieved in highly developed countries, in catching-up economies does it deliver significantly lower values. Vice versa hours worked per employee and proportion of working age in population are mostly higher. Component size and pace of growth or decline, however, may quite differ in particular countries.

Petra Vacková

The main topic of this paper is the economic governance reform in the EU. This reform consists of three main piers: the budgetary surveillance framework, the macroeconomic surveillance framework and the framework for crisis management. This paper focuses on the Stability and Growth Pack´s reform. The financial crisis and the more recent turmoil in sovereign debt markets have clearly highlighted challenges in the European Union´s economic governance. The European Council proclaimed the EU´s economic governance reform as the main priority of the EU in March 2010. The European Commission presented six legal drafts, the so called six pack. The six drafts contain policy recommendations concerning fiscal discipline, proposals for stronger Stability and Growth Pack, broadening economic surveillance, deeper and broader coordination with Member States and a robust framework for fiscal crisis management. It is possible to argue that not all Member States are currently facing an unfavourable economic situation because of their lack of fiscal discipline. The single monetary policy increases the risk of macroeconomic imbalances, for example the current account deficit of balance of payments or the real estate bubble. That is why the European Commission drafted new proposals concerning the macroeconomic surveillance framework and a robust framework for fiscal cisis management. The six pack was approved by the European Parlament in September 2011 and by the Council in November 2011. This paper is based on the final version of the approved legaslative acts. The approved legaslative acts will be published in the Official Journal of the European Union by the end of November 2011.

Sára Lukášková

The Stability and Growth Pact in its current shape and as a result of the 2005 revision presently undergoes a substantive discussion in the EU Council. The discussion responds to the culminating, or subsiding global financial and economic crisis that has led to a considerable increase in government deficits and debts and, in turn, to a considerable increase in costs of debt financing. Over the time of crisis and the subsequent period it has clearly surfaced that rules and procedures of the Pact did not fulfil their expected role, in particular, in good economic times enjoyed by EU economies until 2007. There exists a broad consensus that the preventive arm of the Pact has failed. The first part of the presented study focuses on description and assessment of EU fiscal rules embodied in the Stability and Growth Pact, as applied within assessment of 2010 up-dates of Stability and Convergence Programmes of EU member states. The following part will deal with the fiscal rules and institutions of the Czech Republic in the EU context as viewed from the standpoint of their functionality in promoting the fiscal discipline.

Lubomír Chaloupka, Jakub Mazur, Drahomíra Vašková

Although an expenditure reform is necessary in the Czech surrounding and conditions, a tax reform has been launched since 2008. The reform was discussed so much in the political and economic field and mentioned the word flat tax many times before its approval. What does this term actually mean ? To what measure is the flat tax idea implemented in practice ? You can find answers to these questions in this paper. It contains a theoretical explanation of the flat tax, historical connection and brief description of its single components which covers EU countries and Russia. Because its objective is not to analyze any impacts of the flat tax adoption on the separate economies we can rank it among the information studies.

Vojtěch Čižík

The purpose of this note is to present main conclusions of this year’s assessment of the Stability and Convergence programmes, which the Member States are obliged to submit to the Commission and the Council for evaluation yearly in the autumn. The budgetary year 2006 ended up at better than planned numbers mainly due to an unexpectedly high economic growth. However, the analysis of the programmes and their assessments shows that majority of Member States tend to postpone fiscal consolidation rather than exploiting the benign conditions of economic ‘good times’. Although the European legislation puts the Member States under clear obligation of stronger consolidation effort in the periods of economic expansion, on average the budgetary plans for this year are not sufficiently ambitious. 

Jakub Mazur