Structural changes in the Czech economy: A dsge model approach

Abstract

This article identifies structural changes in the Czech economy in the period from 1996 to 2012 using a DSGE model estimated using Bayesian methods. A structural change is understood as a statistically significant change in model parameter(s). Prior to the first quarter of 1999, there was a structural change that can be primarily attributed to shocks impacting only the domestic economy, and to the domestic monetary authority’s increased preferences towards inflation and exchange rate growth. The elasticity of substitution between domestic and imported consumption goods also increased sharply in this period. As far as the recent economic recession is concerned, it was caused by a much more persistent worldwide technology shock. Habit formation dropped abruptly during the crisis as households tended not to smooth their consumption much anymore. Recursive impulse response analysis carried out on the model suggests that the propagation mechanisms in the model economy changed, implying that the identified structural changes were accompanied by a change in behaviour of the model economy.