Research

Estimating the Armington elasticity: The importance of study design and publication bias

with Josef Bajzik, Tomas Havranek, and Zuzana Irsova

Journal of International Economics 127: 103383

• Abstract

  A key parameter in international economics is the elasticity of substitution between domestic and foreign goods, also called the Armington elasticity. Yet estimates vary widely. We collect 3524 reported estimates of the elasticity, construct 32 variables that reflect the context in which researchers obtain their estimates, and examine what drives the heterogeneity in the results. To account for model uncertainty, we employ Bayesian and frequentist model averaging. To correct for publication bias, we use newly developed non-linear techniques. Our main results are threefold. First, there is publication bias against small and statistically insignificant elasticities. Second, differences in results are best explained by differences in data: aggregation, frequency, size, and dimension. Third, the elasticity implied by the literature after accounting for both publication bias and study quality lies in the range 2.5–5.1 with a median of 3.8.

• Appendix
• Journal version

Bankruptcy, Investment, and Financial Constraints: Evidence from the Czech Republic

with Martin Pospíšil

Eastern European Economics 56(2): 99–121

• Abstract

  Using the investment–cash flow sensitivity to analyze financial constraints over the period 2006–2011 in the Czech Republic, we find that healthy companies were financially constrained both before and after the 2008 crisis. There is robust evidence that both the cash flow and the level of debt have a positive and significant impact on the investment rate. Although companies going bankrupt had significantly higher levels of external debt and bank loans, they did not manifest any investment–cash flow sensitivity in the pre-crisis period, which indicates that they were probably not financially constrained at all. After the 2008 crisis, companies that would later declare bankruptcy began to become financially constrained as well.

• Appendix
• Journal version

Dynamic elasticities of tax revenue: evidence from the Czech Republic

with Tomas Havranek and Zuzana Irsova

Applied Economics 48(60): 5866–5881

• Abstract

  Tax revenue elasticities with respect to tax bases are key parameters for the modeling of public finances. Yet the existing studies estimating these elasticities for emerging countries disregard the effects of tax reforms on tax revenue, which renders their estimates inconsistent. We introduce a framework for estimating both short- and long-run tax revenue elasticities using quarterly data adjusted for the effects of reforms. Our results suggest that the long-run elasticities in the Czech Republic are 1.4 for wage tax, 0.9 for value added tax, 1.7 for profit tax and 1 for social security contributions. The adjustment process for value added tax and social security contributions is fast, but for the remaining two categories, it is important to distinguish between the short- and long-run elasticities: the initial response of revenue to changes in the bases is weak. In the case of wage tax it takes half a year for the elasticity to surpass unity.

• Journal version

Impact of institutions on cross-border price dispersion

Review of World Economics 148(4): 617–645

• Abstract

  This paper analyzes the role of institutions in price dispersion among cities in the European region in the 1996–2009 period. An overview of the literature on the border effect reveals that the role of institutions is completely neglected. Using the Worldwide Governance Indicators as explanatory variables I find that the better the institutions, the lower the predicted dispersion. The result is robust to different specifications of the regression model and it is consistent with a hypothesis that arbitrage, as an entrepreneurial activity and the main power behind the law of one price, is influenced by institutional quality.

• Journal version

The Euro as a Hindrance to Recovery? A Comparative Analysis of the Czech Republic and Slovakia

with Josef Šíma

Institutions in Crisis: European Perspectives on the Recession

• Publisher version

Le système de retraite tchèque

Futur des retraites & retraites du futur II. Les retraites du futur : la capitalisation

The Elasticity of Substitution between Native and Immigrant Labor: A Meta-Analysis

with Klara Kantova, Tomas Havranek, and Zuzana Irsova

CEPR Discussion Papers 21326

• Abstract

  This paper presents the first comprehensive meta-analysis of the elasticity of substitution between native and immigrant labor, drawing on 1,091 estimates from 41 studies. We find strong evidence of selective reporting: less precise estimates are systematically associated with lower reported elasticities. Correcting for this bias using meta-regression and selection methods raises the implied elasticity from about 13 to about 22, implying about 40% less wage pressure from immigration than uncorrected results suggest. Bayesian and frequentist model averaging show that heterogeneity is driven mainly by geographic scale, data granularity, and low worker experience, while the choice between log(mean wage) and mean(log wage) plays a secondary role. Our best-practice estimates, which net out publication bias and prioritize the most granular data, imply an elasticity of about 17 for regional models – lower than a simple bias correction but substantially higher than the uncorrected mean.

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Trust, Rule of Law, and the Size Premium: Evidence from a Meta-Analysis

with Tomas Havranek, Zuzana Irsova, and Jiri Novak

CEPR Discussion Papers 21840

• Abstract

  Reported estimates of the size premium, the tendency of smaller firms to earn higher average returns than larger firms, vary widely across studies, countries, periods, and designs. We examine whether generalized trust and rule of law help account for that heterogeneity. Small firms are more opaque and more dependent on outside finance, so the enforcement and information environment should matter more for them than for large firms. We study 1,613 reported size-slope estimates from 105 studies and 31 countries. The meta-regressions control for study design, specification, precision, publication context, and market and macro-financial conditions; Bayesian model averaging assesses uncertainty over the control set. The more stable association is with rule of law, and it runs against the intuitive expectation that better legal institutions shrink the premium: stronger rule of law is associated with more negative reported size slopes, hence larger conventional size premia. The trust association is conditional and less precisely estimated: where rule of law is weak, higher generalized trust is linked to less negative reported slopes (and thus a weaker premium), and this link fades as rule of law strengthens. Formal and informal institutions thus help organize part of the disagreement in this literature, although the analysis concerns variation in reported estimates and does not identify causal effects.

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Inflation Rates in Europe: Legacy of the Iron Curtain

with Tomáš Adam

IREF Working Papers 202410

Ace in Hand: The Value of Card Data in the Game of Nowcasting

with Tomáš Adam, Jan Bělka, Martin Hlůže, Jakub Matějů, and Hana Prause

CNB Working Paper Series 14/2023

• Abstract

  We use Mastercard card payments data to nowcast turnover in Czech retail sales and services. We show that an index based on this data tracks surprisingly well the official retail sales data released by the Czech Statistical Office (CZSO) more than a month later. We further show that the card payments data not only helps in backcasting Czech retail sales after the end of the month, but also provides valuable information for the nowcast as soon as three weeks into the ongoing month. That is six to seven weeks ahead of the official release. To illustrate the usefulness of our method, we show that we would have been able to backcast, with reasonable accuracy, the sharp drop in retail sales that occurred at the outbreak of the first wave of covid-19 in Czechia in March 2020 four weeks before the March data was released by the CZSO.

• PDF

Patents: A Means to Innovation or Strategic Ends?

with Martin Stepanek

IES Working Papers 2016/08

• Abstract

  This paper utilizes a data set of over 208,000 U.S. patents applied for between 1975 and 2010 to study development of strategic patenting over time and across industries. With received citations as a measure of patent social value, we use data envelopment analysis to estimate firm-level relative importance of strategic versus protective patenting. Our novel identification strategy reveals there was an almost universal drop in patent social value in the second half of the 1990s, signaling a shift towards the strategic use of patents. But the development of patenting strategies continued even after 2000 with semiconductor companies increasing their focus on patent value relative to companies from other industries. On average, aerospace and software companies preferred the production of valuable patents, but patenting strategies can differ vastly even among companies operating within one industry. The results confirm our expectations regarding the focus of aerospace companies on socially valuable patents.

Foreign exchange interventions as an (un)conventional monetary policy tool

with Lubomír Lízal

BIS Papers 73: 127–143

• Abstract

  The zero level of interest rates constitutes a limit of this standard monetary policy instrument. Based on the example of the Czech Republic we argue that in such a situation foreign exchange interventions represent a meaningful monetary policy tool for small open economies not facing serious liquidity problems. Existing studies also suggest that potential financial losses of central banks stemming from the buildup of international reserves do not necessarily compromise credibility or the ability to pursue monetary policy objectives. We provide an overview of the evidence on the functioning of FX interventions and the exchange rate pass-through to consumer prices. Using simulations which take into account the existence of the zero lower bound, we argue that in such a situation the pass-through can be much larger than the existing evidence suggest.

• SSRN