Bayesian estimation of model with financial frictions on Czech data



Year of publication 2011
Type Article in Proceedings
Conference Proceedings of the 29th International Conference on Mathematical Methods in Economics
MU Faculty or unit

Faculty of Economics and Administration

Field Economy
Keywords financial frictions; Bayesian methods
Description As the global economy seems to be recovering from 2009 financial crisis, we find it desirable to look back and analyze Czech economy ex post. We work with Swedish New Keynesian model of a small open economy which embeds financial frictions in light of financial accelerator literature. Without explicitly modeling the banking sector, this model serves as a tool to understand how a negative financial shock may spread into real economy and how monetary policy may react. Financial variables turn out to be a significant driver in explaining the business cycle dynamics. We use Bayesian techniques to re-estimate original model parameters to adjust the model structure closer to evidence stemming from Czech data. Our attention focuses on a series of experiments in which we generate ex post forecasts of the economy prior to 2009 crisis and illustrate that monetary policy response to upcoming crisis in case of the Czech Republic might have been even more aggressive in terms of policy rate cut.
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