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Working Paper Series in Economics
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No. wp2011-09
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- Kadri M�nnasoo and Jaanika Merikull
- How do demand fluctations and credit constraints affect R&D? Evidence from Central, Southern and Eastern Europe.
The opportunity cost approach suggesting a countervailing cyclical effect between R&D and short-term investments is the subject of theoretical and empirical debate. We extend the discussion by investigating the impact of demand fluctuations and credit constraints on firms' R&D in ten new EU member states from Central, Southern and Eastern Europe (CSEE). Using membership of the OECD as a proxy for the country's level of development we find more counter-cyclicality amongst the firms in non-OECD CSEE countries, while a similar but somewhat less accentuated counter-cyclical pattern of R&D behaviour emerges in the more advanced OECD-CSEE countries. Surprisingly, any adverse effect from credit constraints on firm's engagement in R&D is largely absent in CSEE countries
- JEL-Codes: G31, E32, O30, O52
- Keywords: R&D cyclicality, demand shocks, credit constraints, Central and Eastern Europe
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No. wp2011-08
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- Juan Carlos Cuestas and Karsten Staehr
- Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe
This paper analyses the time series properties of the fiscal balance in the 10 EU countries from Central and Eastern Europe. The persistence of shocks in the variable is analysed by means of unit root tests that account for the possibility of non-linearities and structural changes. The results of linear and non-linear unit root tests find only mild evidence in favour of the stationarity hypothesis, with asymmetric effects present in a few cases. After controlling for structural changes in the data generation process, the results point to stochastic stationarity of the series. Thus, in spite of relatively steady headline figures, the public balance processes exhibit substantial instability in the EU countries from Central and Eastern Europe
- JEL-Codes: C32, E24
- Keywords: unit roots, structural breaks, budget balance, EU
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No. wp2011-07
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- Kadri M�nnasoo and Jaanika Merikull
- R&D in boom and boost : evidence from the World Bank Financial Crisis Survey
The full implications of the global financial crisis of 2008-2009 are yet to be revealed. The crucial question is whether a crisis of such severe magnitude will set "cleansing mechanisms" into motion as suggested by the opportunity cost argument of R&D, or rather destroy the long-term productivity enhancing incentives? The World Bank Financial Crisis Survey collects direct self-reported measures of firms' credit frictions and R&D during 2009-2010 from six countries: Bulgaria, Latvia, Lithuania, Hungary, Romania and Turkey. Employing this dataset, we seek evidence of how the firms' R&D responded to the negative demand shock and credit contraction at the time of the crisis. Looking at two distinct episodes, the sustained economic growth in 2001-2007 and the sudden slump in 2009-2010, we observe a paradigm shift in firms' R&D decisions: whilst the R&D is counter-cyclical during the pre-crisis period, a pro-cyclical pattern emerges during the crisis
- JEL-Codes: G31, E32, O30, O52
- Keywords: R&D cyclicality, demand shocks, credit constraints, financial crisis
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No. wp2011-06
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- Aurelijus Dabu�inskas and Tairi Room
- Survey evidence on wage and price setting in Estonia
In this paper, we give a comprehensive overview of wage and price adjustment practices in Estonia, drawing from two managerial surveys which were conducted in autumn 2007 and summer 2009 within the framework of the Wage Dynamics Network (WDN), a joint research project by the Eurosystem/ESCB. Our discussion covers a broad range of results, including firm-level descriptive evidence for several institutional and structural characteristics of the Estonian economy such as unionisation and collective bargaining coverage, labour intensity of production, remuneration methods, product market competition, etc., and insights into the wage and price setting behaviour of Estonian firms. To illustrate this behaviour, we give an overview of the frequency and timing of wage and price changes; the extent of downward nominal and real wage rigidity; the determinants of wages paid to newly employed workers; and finally, the nature of firms' adjustments to cost push and negative demand shocks
- JEL-Codes: D22, E3, J3
- Keywords: survey data, wage setting, price setting, Estonia
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No. wp2011-05
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- Kadri M�nnasoo and Jaanika Merikull
- R&D, demand fluctuations and credit constraints: comparative evidence from Europe.
This paper contributes to the literature by investigating whether the cyclicality of R&D differs across countries with different levels of development. The paper uses micro-data from the World Bank/EBRD Business Environment and Enterprise Performance survey from 2001- 2007 and estimates bivariate probit model of firms' R&D conditioned on credit constraints. The main results are: (1) The likelihood of a firm conducting R&D increases with sales growth and decreases with credit constraints. (2) R&D by firms is counter-cyclical to exogenous industry output and a negative industry demand shock has a stronger countercyclical effect on R&D than a positive industry demand shock does. (3) R&D is more counter-cyclical to demand shocks the further the country is from the technological frontier
- JEL-Codes: G31, E32, O30, O52
- Keywords: R&D cyclicality, demand fluctuations, credit constraints, comparative study
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No. wp2011-04
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- Tairi Rõõm and Aurelijus Dabušinskas
- How wages respond to shocks : asymmetry in the speed of adjustment
The time series of various economic variables often exhibit asymmetry: decreases in the values tend to be sharp and fast, whereas increases usually occur slowly and gradually. We detect signs of an analogous asymmetry in firms' wage setting behaviour on the basis of managerial surveys, with employers tending to react faster to negative than to positive shocks in the same variables. As well as describing the presence of asymmetry in the speed of wage adjustment, we investigate which companies are more likely to demonstrate it in their behaviour. For this purpose, we apply the Heckman selection model and develop a methodology that improves identification by exploiting heteroscedasticity in the selection equation. The estimation results imply that companies operating in a more competitive environment have a higher propensity to react asymmetrically. We also find that businesses relying on labour-intensive production technology are more likely to react faster to negative shocks. Both of these findings support the hypothesis that this behaviour results from companies' attempts to protect profit margins.
- JEL-Codes: J30, J31, J33
- Keywords: wage dynamics, asymmetry, wage setting, survey
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No. wp2011-03
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- Karin Kondor and Karsten Staehr
- The impact of the global financial crisis on output performance across the European Union: vulnerability and resilience.
This paper uses regression analyses to explain the different output performance in the 27 countries in the EU based on measures of their pre-existing vulnerability and resilience. Rapid financial deepening and high financial leverage, both domestically and externally, were followed by larger output losses during the crisis. The level of financial depth, on the other hand, did not affect output negatively. A large degree of trade openness was associated with weaker output performance, possibly because of falling export demand during the crisis. Finally, government deficits and debt stocks do not seem have impacted negatively on output. The Baltic States stand out as having much explanatory power in the sample due to their large output losses during the crisis.
- JEL-Codes: E32, F4, G01, H12
- Keywords: global financial crisis, contagion, business cycles, GDP
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No. wp2011-02
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- Jaan Masso, Jaanika Merikull and Priit Vahter
- Gross profit taxation versus distributed profit taxation and firm perfomance : effects of Estonia,s corporate income tax reform
This paper estimates the effect of the corporate tax reform in Estonia in the year 2000. This unique reform nullified the taxation of retained earnings and retained the corporate income tax only on distributed profits. The effect of the reform is identified by comparing the performance of Estonian firms that were affected with that of firms from Latvia and Lithuania, the two other Baltic states. We use firm-level financial data and the difference in differences and propensity score matching methods for our analysis. The results show that the corporate tax reform has resulted in increased holdings of liquid assets and lower use of debt financing. These developments have contributed positively to firms' survival during the recent global economic crisis. A positive effect on investment and labour productivity has also been found
- JEL-Codes: H25, H32, D22, O16
- Keywords: corporate income tax, capital structure, liquidity, investments, productivity, comparative economic development
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No. wp2011-01
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- Jaanika Meriküll
- Labour market mobility
during a recession :
the case of Estonia
The paper investigates the dynamics of worker flows and the duration of different labour market states during the recent boom and bust of 2001-2010 in Estonia. We find that labour market adjustment has mostly taken place through massive worker reallocation, resulting in a high unemployment rate. Despite high worker flows from employment to unemployment, labour market mobility has fallen in many ways during the recession: job tenure and unemployment spells have increased, while job-to-job transitions and mobility across industries and occupations have fallen. The unemployed with the lowest level of education and non-Estonians have the lowest mobility to enter employment and run the highest risk of long-term unemployment. There is evidence of softer ways of adjustments to the crisis, where more workers are engaged in remote work, part-time work or jobs that do not match their skills. Internal migration has small potential to alleviate the high unemployment. The current crisis has hit the country more evenly across its regions than the Russian crisis did. Unemployment has increased similarly in all regions and unemployment inequality has dropped. Even so, there are some signs of marginalisation. The situation is worst in the north-eastern part of the country with unemployment hitting 25%
- JEL-Codes: J60, E32, J61, J62, J64
- Keywords: worker reallocation, unemployment and employment duration, business cycle
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