Structural changes in the Czech, Slovak and euro area economies during the Great Recession

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Abstract

The goal of this paper is to identify and compare the most important changes in the structure of the Czech economy, as a small open economy with independent monetary policy, the Slovak economy, as a small open economy that entered monetary union, and the economy of the euro area, which has a common monetary policy, during the turbulent period of the Great Recession, the subsequent anaemic recovery and recent disinflationary period. Structural changes are identified with the help of nonlinear dynamic stochastic models of general equilibrium with time-varying parameters. The model parameters are estimated using Bayesian methods and a nonlinear particle filter. The results confirm the similarity of the Czech and Slovak economies and show that in certain respects the structure of the Czech economy might be closer to that of the euro area than that of Slovakia. The time-varying estimates reveal many similarities between the parameter changes in the Czech economy and those in the euro area. In Slovakia, the situation during the Great Recession was dominated by the country’s adoption of the euro, which caused large deviations in its Calvo parameters.

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