Business Cycle Synchronization through the Lens of a DSGE Model



Year of publication 2013
Type Article in Periodical
Magazine / Source Finance a úvěr - Czech Journal of Economics and Finance
MU Faculty or unit

Faculty of Economics and Administration

Field Economy
Keywords DSGE model; Bayesian estimation; shock decomposition; business cycle synchronization
Description The goal of this paper is to examine business cycle synchronization between the Czech economy and the euro area via a fully specified DSGE model. Using a two-country DSGE model I decompose the observed variables into the contributions of structural shocks and then compute conditional correlations. I also examine how these correlations evolve over time. The results indicate that productivity shocks in the tradable sector are the driving forces of different business cycle behavior, while investment efficiency shocks contribute to symmetric behavior of the two economies. The impact of shocks is most symmetric in the case of investment, output, and interest rates; the impact of shocks on these variables is highly correlated. There seems to be convergence of business cycles in the case of consumption, investment, and output, as the overall impact of shocks on these variables is getting more and more symmetric over time.
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