Small open economy in period of recession: Nonlinear DSGE approach

In this paper, we study a model of a small open economy and its behavior with respect to the period of the global recession and the subsequent recovery. As an example, the dynamic stochastic model of a general equilibrium of the Czech real economy is used. In the first part of the paper a model with the constant parameters is estimated. We use historic shock decomposition of the main macroeconomic variables to identify shocks, which played the most significant role in the recession. In the subsequent analysis we use the same model, but we relax the typical assumption about structural parameters and we let them to vary in time. Their changes would imply, that the global recession had an influence on the structure of the economy. The economy is represented by the second order approximation of a non-linear DSGE model. The unscented particle filter is used to identify the trajectories of the time-varying parameters.