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Analyses of the Czech Republic's Current Economic Alignment with the Euro Area

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Analyses of the Czech Republic's Current Economic Alignment with the Euro Area ECONOMIC ALIGNMENTWITHTHEEURO ANALYSES OFTHECZECHREPUBLIC ’S CURRENT AREA 2015 1 Authors: Tomáš Adam D1 Oxana Babecká Kucharčuková 1.1.4, 1.1.6 Jan Babecký 1.2.5, Box 2 Vojtěch Belling D2 Soňa Benecká 1.1.5, 1.1.7, Box 1 Jan Brůha C, 2.2.5 Kamil Galuščák Box 2 Tomáš Holub A, B, 1.1.1 Eva Hromádková 1.1.2, 2.1.3 Luboš Komárek D1, 1.2.5 Zlatuše Komárková 1.2.5 Kamila Kulhavá A, B Petr Král A, B Ivana Kubicová 1.2.2, 1.2.3 Filip Novotný 1.1.8 Lucie Matějková A, B Renata Pašaličová 1.2.6 Lukáš Pfeifer 1.2.1, 2.4 Marek Rusnák 1.2.1, 2.4 Luboš Růžička 2.2.1, 2.2.3, 2.2.4 Branislav Saxa 1.2.4 Pavel Soukup 2.1.1, 2.1.2, 2.1.3 Radek Šnobl 1.1.3, 2.2.1, 2.2.3, 2.3.1, 2.3.2 Jan Šolc 1.1.3, 2.2.2 Martin Vojta D2 Mário Vozár 2.2.4 Editors: Kamila Kulhavá Lucie Matějková Czech National Bank / Analyses of the Czech Republic’s current economic alignment with the euro area 2015 CONTENTS 1 A INTRODUCTION ................................................................................................... 5 B SUMMARY ............................................................................................................ 6 C THEORETICAL FOUNDATIONS OF THE ANALYSES .............................................. 14 D ECONOMIC ALIGNMENT OF EURO AREA COUNTRIES .......................................... 19 1 ANALYSIS OF EURO AREA ECONOMIC COHESION ............................................. 19 1.1 Convergence of real and nominal variables ......................................................... 19 Box 1: Structural alignment of euro area countries and the Central European region from the perspective of cluster analysis .......................................................................... 23 1.2 Fiscal situation of euro area countries ................................................................ 26 2 ECONOMIC POLICY AND INSTITUTIONAL DEVELOPMENTS IN THE EUROPEAN UNION AND THE EURO AREA .................................................................................. 27 E RESULTS OF THE ANALYSES ............................................................................... 33 1 CYCLICAL AND STRUCTURAL ALIGNMENT ......................................................... 33 1.1 Direct alignment indicators ............................................................................... 33 1.1.1 Real economic convergence ......................................................................... 33 1.1.2 Correlation of economic activity ................................................................... 38 1.1.3 Correlation of the cyclical component of unemployment .................................. 42 1.1.4 Structural similarity of the economies ........................................................... 45 1.1.5 Interest rate convergence ........................................................................... 46 1.1.6 Exchange rate alignment ............................................................................ 48 1.1.7 Analysis of exchange rate volatility............................................................... 49 1.1.8 Integration of the economy with the euro area .............................................. 51 1.2 Similarity of monetary policy transmission ......................................................... 55 1.2.1 Financial system ........................................................................................ 55 1.2.2 Structure of financial assets and liabilities of corporations and households ........ 57 1.2.3 Effect of monetary policy on client interest rates ............................................ 64 1.2.4 Inflation persistence ................................................................................... 70 1.2.5 Financial market alignment ......................................................................... 71 1.2.6 Spontaneous euroisation ............................................................................. 77 2 ADJUSTMENT MECHANISMS .............................................................................. 80 2.1 Fiscal policy .................................................................................................... 80 2.1.1 Stabilising function of public budgets ............................................................ 80 2.1.2 Government deficit and debt and the scope for stabilising fiscal policy .............. 82 2.1.3 Government finance sustainability ................................................................ 86 2.2 Labour market flexibility .................................................................................. 87 2.2.1 Unemployment and internal labour market flexibility ...................................... 87 Box 2: Adjustment in the employment area: Firm-level survey evidence ..................... 91 2.2.2 Estimate of structural unemployment using the NAIRU ................................... 92 2.2.3 International labour mobility ....................................................................... 93 2.2.4 Institutional environment ............................................................................ 94 2.2.5 Rate of adjustment of real wage growth to the business cycle ........................ 101 2.3 Product market flexibility ................................................................................ 101 2.3.1 Administrative barriers to entrepreneurship .................................................. 101 2.3.2 Tax burden on businesses .......................................................................... 104 2.4 The banking sector and its shock-absorbing capacity .......................................... 105 3 SUMMARY OF RESULTS OF ANALYSES ............................................................. 109 F METHODOLOGICAL PART ................................................................................. 116 G REFERENCES .................................................................................................... 134 Czech National Bank / Analyses of the Czech Republic’s current economic alignment with the euro area 2015 TABLES 2 Table 1: GDP per capita at purchasing power parity ......................................................... 34 Table 2: Average price level of GDP ............................................................................... 34 Table 3: Real exchange rate against the euro.................................................................. 35 Table 4: Three-month ex-post real interest rates ............................................................. 37 Table 5: Correlation coefficients of economic activity ....................................................... 40 Table 6: Correlation coefficients of exports to the euro area with euro area GDP ................. 41 Table 7: Unemployment gap correlations ........................................................................ 44 Table 8: Unemployment gap concordance....................................................................... 44 Table 9: Grubel-Lloyd indices by degree of aggregation .................................................... 53 Table 10: Ratios of FDI stock from the euro area to GDP .................................................. 54 Table 11: Ratios of DI stock in the euro area to GDP ........................................................ 54 Table 12: Correlation between changes in rates on loans to non-financial corporations (fixed for up to one year) and changes in three-month market rates ........................................... 67 Table 13: Correlation between changes in rates on loans for house purchase and changes in market rates ............................................................................................................... 70 Table 14: Inflation persistence estimates ........................................................................ 71 Table 15: Beta coefficients ............................................................................................ 72 Table 16: General government balance, European Commission estimate ............................ 83 Table 17: Shares of mandatory state budget expenditure ................................................. 84 Table 18: Public revenues and expenditures relative to GDP in 2014 .................................. 84 Table 19: General government debt, European Commission estimate................................. 85 Table 20: Debt service, European Commission estimate ................................................... 85 Table 21: Age-related government expenditures ............................................................. 86 Table 22: Long-term unemployment rate ....................................................................... 87 Table 23: Rate of economic activity in the 15–64 age category ......................................... 89 Table 24: Coefficient of variation of the unemployment rate ............................................. 90 Table 25: Internal migration ......................................................................................... 90 Table 26: Share of foreign nationals in the population ...................................................... 94 Table 27: Minimum wage ............................................................................................. 95 Table 28: Ratio of the minimum wage to the gross monthly wage in selected professions ..... 95 a) Table 29: Employment protection legislation (EPL) index ................................................ 96 Table 30: Overall labour taxation..................................................................................
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