CNB Research News

Dear All,

Welcome to the second issue of CNB Research News. This time, in a new layout.

Our mission remains the same. We plan to inform you roughly once every quarter about our latest articles, upcoming events and other topics related to research at the Czech National Bank. We hope this newsletter will help us to stay in touch with each other and exchange interesting ideas. 

Please, do not hesitate to contact us, to share your opinion or your own research output. We highly appreciate your feedback.

Sincerely Yours,

Jan Brůha and Simona Malovaná
On behalf of our research teams

Death to the Cobb-Douglas Production Function? A Quantitative Survey of the Capital-Labor Substitution Elasticity

The paper shows that the large elasticity of substitution between capital and labor estimated in the literature to be, on average, 0.9, can be explained by publication bias and specific method and data choices. After correcting for these biases, the mean elasticity shrinks to 0.3, one-third of the simple average of all estimates. The weight of evidence accumulated in the empirical literature thus emphatically rejects the Cobb-Douglas specification.

Macroprudential Ring-Fencing

The paper anchors macroprudential policies into a wider discussion on the mechanism and implications of ring-fencing in the EU over time. Observed phase-in patterns of structural capital buffers in the EU are broadly consistent with credit risk materialisation and the share of foreign-owned banks' assets as potential factors. Further, the paper provides a discussion of potential implications of the recent adoption of the CRRII/CRDV legislation for future heterogeneity of macroprudential policies in the EU.

Annual Assessment of the Forecasts Included in GEO

The article assesses last year's forecasts by individual institutions for individual variables. In general, the shorter the forecast horizon, the more accurate the forecasts become. Forecasts for both GDP growth and inflation were too optimistic. Moreover, inflation forecast errors were more pronounced compared to GDP ones.

The Fiscal Policy Reaction to COVID-19, or the Fast Way out of the Crisis

The article provides an overview of the approaches of selected countries to supporting their economies and contains an analysis of the reasons for the fiscal stimuli and an assessment of the effectiveness of the current measures. It also warns that high debt may cause a long-lasting problem. 

Impacts of the COVID-19 Pandemic on the World Economy

The article contains a detailed global econometric model-based quantification of the impacts of the COVID-19 pandemic on the economies of China, the US and the euro area, offering a unique view for a better understanding of transmission of the complex mix of supply and demand shocks.

Vulnerable growth: Bayesian GDP-at-Risk

This thematic article presents a new approach used by the CNB for quantifying the vulnerable real GDP growth risk. This approach uses Bayesian quantile regression to estimate the distribution of future real GDP growth conditional on the vulnerability of the financial system. Quantifying vulnerable real GDP growth risk gives the CNB an additional financial stability indicator revealing the degree of vulnerability of the Czech financial system.

Central Banks' Monetary Policy in Response to the Coronavirus Epidemic

The article offers a comprehensive overview of the extraordinary measures adopted to support economies across selected central banks in response to the coronavirus epidemic.

The Balance of Payments and Its Importance for a Central Bank

The article presents in a simplified form the sophisticated structure of the balance of payments, emphasising its close relationship with a central bank's macroeconomic policy. Furthermore, it points out the links between the evolution of the balance of payments and its sibling statement of the international investment position, as well as its relationship with a country's external debt, including public budget performance.

Cyclically Adjusted Current Account

The article proposes an approach based on an economic model decomposing the items of the current account into long-term trends, cyclical factors and one-off volatility. This allows the current account to be adjusted for one-off and cyclical factors. The presented econometric model can also be used to prepare economic scenarios and predictions of current account items.

International Trade and Long-Term Economic Growth

Given the positive link between international trade and long-term economic growth, the current coronavirus pandemic threatens a negative effect on long-term economic performance.  Based on the literature, the article estimates that if international trade was reduced in the long term, each 10 per cent of the decrease would result in a decline in the long-term economic growth rate of 0.1-0.2 percentage point a year in advanced economies.