Structural Differences and Asymmetric Shocks between the Czech Economy and the Euro Area 12

The goal of this paper is to determine whether there exist asymmetric shocks and structural differences between the Czech economy and the Euro Area 12. A New Keynesian DSGE model of a small open economy is used for this purpose. Asymmetric shocks and structural differences are examined in two ways. At first, I examine asymmetry of shocks and sources of structural differences, using model comparison based on the Bayes factor. I do not find substantial evidence in favor of heterogeneity in household preferences. I find slight differences in price and wage formation and substantial difference in interest rate smoothing. However, the main differences are in timing, persistence and volatility of structural shocks. I also investigate impact of structural differences and differences in persistence and volatility of structural shocks on the behavior of both economies, using analysis of impulse-response functions. I find no substantial differences in responses of the main variables to preference shocks. On the other hand, I find much larger volatility and persistence of domestic technology shocks. This contributes to the fact that responses of domestic variables to technology shocks are much larger, and display more gradual and hump-shaped pattern than responses of foreign variables. I also find that responses of foreign variables to labour supply shocks are much more gradual and sluggish than responses of domestic variables. As regards monetary shocks, I find that there is almost no response of foreign inflation to foreign monetary shock while response of domestic inflation to domestic monetary shock displays substantial decline followed by gradual recovery. Responses of foreign variables to cost-push shocks are larger and more volatile than responses of domestic variables.