BANK TECHNICAL EFFICIENCY, PURE TECHNICAL EFFICIENCY AND SCALE EFFICIENCY, DOES ECONOMIC FREEDOM MATTER? EVIDENCE FROM CENTRAL EUROPE

Abstract

The current study attempts to investigate the impact of the limitation of economic freedom on conventional bank technical efficiency and its components (pure technical efficiency and scale efficiency) by using data from the region of central Europe. Non-parametric Data Envelopment Analysis (DEA) is employed to measure the bank's technical efficiency and its components levels. The applied method of estimation consists of “pooled Ordinary Least Square (OLS), Fixed Effect Model (FEM), Random Effect Model (REM), and the Generalized Method of Moments (GMM)” to investigate the influence of economic freedom and other potential determinants on bank efficiency. This study has found that the indicators of Government Spending, Fiscal Health, Business Freedom, Labor Freedom, and Financial Freedom have positive relationships with bank’s technical efficiency, pure technical efficiency, and scale efficiency. Contrariwise, Overall Economic Freedom, Monetary Freedom, and Investment Freedom exhibit a negative impact on a bank’s technical efficiency and its components. Implications from the study permit the related parties to identify the significant dimensions of economic freedom to the efficiency of the banks to ensure better bank performance.