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The Convergence of a Transition Economy: The Case of the Czech Republic


  • Jan Bruha
  • Jiri Podpiera
  • Stanislav Polak


In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run paths of a converging emerging market economy. The model’s novel feature is the inclusion of quality investment to the standard framework of applied general equilibrium two-country models. This extension proves crucial ingredient for explanation of the trend in real exchange rate. Using a case study calibration of productivity and deep parameters for the Czech economy we demonstrate the ability of the model to consistently explain dynamics in key macroeconomic variables that are essential inputs for commonly used ‘gap models’ in monetary policy practice.

Suggested Citation

  • Jan Bruha & Jiri Podpiera & Stanislav Polak, 2007. "The Convergence of a Transition Economy: The Case of the Czech Republic," Working Papers 2007/3, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:wpaper:2007/3

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    References listed on IDEAS

    1. Vladislav Flek & Lenka Marková & Jiøí Podpiera, 2003. "Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(3-4), pages 130-153, March.
    2. Armstrong, John & Black, Richard & Laxton, Douglas & Rose, David, 1998. "A robust method for simulating forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 489-501, April.
    3. Baldwin, Richard E. & Forslid, Rikard, 2000. "Trade liberalisation and endogenous growth: A q-theory approach," Journal of International Economics, Elsevier, vol. 50(2), pages 497-517, April.
    4. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    5. Ian Babetskii & Balázs Égert, 2005. "Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(5-6), pages 232-252, May.
    6. Henning Ahnert & Geoff Kenny, 2004. "Quality adjustment of European price statistics and the role for hedonics," Occasional Paper Series 15, European Central Bank.
    7. Brůha, Jan & Podpiera, Jiří, 2007. "Transition economy convergence in a two-country model: implications for monetary integration," Working Paper Series 740, European Central Bank.
    8. Égert, Balázs & Lommatzsch, Kirsten, 2004. "Equilibrium exchange rates in the transition : the tradable price-based real appreciation and estimation uncertainty," BOFIT Discussion Papers 9/2004, Bank of Finland, Institute for Economies in Transition.
    9. Boucekkine, Raouf, 1995. "An alternative methodology for solving nonlinear forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 711-734, May.
    10. Jiri Popiera & Jan Bruha, 2007. "Inquiries on Dynamics of Transition Economy Convergence in a Two-Country Model," 2007 Meeting Papers 587, Society for Economic Dynamics.
    11. Judd, Kenneth L., 2002. "The parametric path method: an alternative to Fair-Taylor and L-B-J for solving perfect foresight models," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1557-1583, August.
    12. Martin Cincibuch & Jiří Podpiera, 2006. "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(3), pages 547-573, July.
    13. Hanousek, Jan & Filer, Randall K, 2004. "Consumers' Opinion of Inflation Bias Due to Quality Improvements," Economic Development and Cultural Change, University of Chicago Press, vol. 53(1), pages 235-254, October.
    14. Juillard, Michel & Laxton, Douglas & McAdam, Peter & Pioro, Hope, 1998. "An algorithm competition: First-order iterations versus Newton-based techniques," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1291-1318, August.
    15. Jiri Podpiera & Marie Rakova, 2006. "Degree of Competition and Export-Production Relative Prices when the Exchange Rate Changes: Evidence from a Panel of Czech Exporting Companies," Working Papers 2006/10, Czech National Bank, Research Department.
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    Cited by:

    1. Melecky, Ales & Melecky, Martin, 2008. "From Inflation to Exchange Rate Targeting: Estimating the Stabilization Effects," MPRA Paper 10844, University Library of Munich, Germany.
    2. Brůha, Jan & Podpiera, Jiří, 2007. "Inquiries on dynamics of transition economy convergence in a two-country model," Working Paper Series 791, European Central Bank.

    More about this item


    Convergence; monetary policy; two-country modeling.;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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