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A DSGE model of the Czech economy: a Ministry of Finance approach

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  • Zbynek Stork

Abstract

Te task was to build up a DSGE model that will suite to specificities of the Czech economy. The result is a small open economy structural model that serves for analytical purposes of the Ministry of Finance of the Czech Republic. Namely, for prediction purposes as a support in preparations of regular quarterly Macroeconomic Forecast and also for preparing various simulations. Among those most important could be highlighted sensitivity scenarios for annual Convergence Programme of the Czech Republic and analysis of macroeconomic impacts of various fiscal policy measures.The model relies on a general equilibrium and the resulting consistency of all blocks in the model. The government regulates tax and transfer policy. The Central Bank, operating under the inflation targeting regime, determines a short term policy rate. Households supply labour to firms and spend their income for consumption. We distinguish between two types of consumers - Ricardians and so called Rule-of-Thumb consumers. Business sector in the model is represented by three different firms: (i) importers buying goods for consumption and/or further production; (ii) producers combining imported and domestic inputs to produce intermediate products for retailers; (iii) retailers selling final goods to domestic agents (households and/or government) and/or export abroad. Since the Czech economy is a small open and raw materials dependent economy, foreign trade (mainly with other EU countries) is of the importance.Although the intention was to build rather simple model, it shows reasonable results. The model has been used for several predictions, during which was slightly adjusted. Also simulations of fiscal policy measures have been carried out using this model - mainly in the last year, when the government policy was oriented on austerity measures. We were able to calculate macroeconomic impacts of changes in taxes on wages, taxes on consumption and paid out social benefits.

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  • Zbynek Stork, 2011. "A DSGE model of the Czech economy: a Ministry of Finance approach," EcoMod2011 3007, EcoMod.
    • Handle: RePEc:ekd:002625:3007
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