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An Economy in Transition and DSGE: What the Czech National Bank’s New Projection Model Needs

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  • Jaromir Benes
  • Tibor Hledik
  • Michael Kumhof
  • David Vavra

Abstract

Since the introduction of the inflation targeting regime in 1998 the Czech National Bank has made considerable progress in developing formal tools for supporting its Forecasting and Policy Analysis System. This paper documents the advances in the ongoing research aimed at developing a DSGE small open economy model designed to capture some of the most important features of the Czech economy - both the business-cycle regularities and the recent developments associated with the economy's transition and its convergence towards the industrialized European countries. The model in its current form is able to capture trends in relative prices, allow for medium-convergence in expenditure shares, and deal with the undercapitalization and investment inflow issues. Besides the model exhibits real and nominal rigidities that are in line with the recent New Open Economy Macroeconomics literature built fully on first principles. The innovative features of our model include the international currency pricing scheme permitting flexible calibration of import and export price elasticities along with the disconnect of the nominal exchange rate, the policy reaction function with a parameterized forecast horizon, and a generalized capital accumulation equation with imperfect intertemporal substitution of investment.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2005/12.

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Date of creation: Dec 2005
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Handle: RePEc:cnb:wpaper:2005/12

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Citations

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Cited by:
  1. Nicolas Alexis Cuche-Curti & Harris Dellas & Jean-Marc Natal, 2009. "A dynamic stochastic general equilibrium model for Switzerland," Economic Studies 2009-05, Swiss National Bank.
  2. Josef Arlt & Martin Mandel, 2012. "Is it Possible to Predict the CNB Repo Rate on the Basis of the Backward-Looking Monetary Rule?," Politická ekonomie, University of Economics, Prague, vol. 2012(4), pages 484-504.
  3. Katerina Smidkova & Aleš Bulíø, 2008. "Hits and Misses: Ten Years of Czech Inflation Targeting (Introduction)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(09-10), pages 398-405, December.
  4. Adnan Haider Bukhari & Safdar Ullah Khan, 2008. "A Small Open Economy DSGE Model for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 963-1008.
  5. Jaromír Kukal & Tran Van Quang, 2011. "Modeling the CNB's Monetary Policy Interest Rate by Artificial Neural Networks," Politická ekonomie, University of Economics, Prague, vol. 2011(6), pages 810-829.
  6. Michal Andrle & Tibor Hledik & Ondra Kamenik & Jan Vlcek, 2009. "Implementing the New Structural Model of the Czech National Bank," Working Papers 2009/2, Czech National Bank, Research Department.
  7. Jaromír Hurník & Zdenìk Tùma & David Vávra, 2010. "The Euro Adoption Debate Revisited: The Czech Case," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(3), pages 194-212, August.
  8. Roman Horváth, 2007. "Estimating Time-Varying Policy Neutral Rate in Real Time," Working Papers IES 2007/01, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jan 2007.
  9. Melecky, Ales & Melecky, Martin, 2010. "From inflation to exchange rate targeting: Estimating the stabilization effects for a small open economy," Economic Systems, Elsevier, vol. 34(4), pages 450-468, December.
  10. Roman Horvath, 2007. "The Time-Varying Policy Neutral Rate in Real Time: A Predictor for Future Inflation?," Working Papers 2007/4, Czech National Bank, Research Department.
  11. Malikane, Christopher & Ojah, Kalu, 2014. "Fisher's Relation and the Term Structure: Implications for IS Curves," MPRA Paper 55553, University Library of Munich, Germany.

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