ECONOMIC PEFORMANCE ESTIMATION OF THE VISEGRAD GROUP COUNTRIES

The purpose of this paper is to estimate a gap model of the Visegrad Group including core macroeconomic variables as aggregate demand, aggregate supply, interest rates, exchange rates and unemployment, further enriched by a fiscal block for Slovakia. This model takes a form of global projection model, since incorporating mutual linkages between the economies and also their most important trading partner, aggregated eurozone. Gap models are based on a small number of linear behavioural equations capturing macroeconomic fundamentals and underlying stochastic processes pinning down the long-run trend values. Although proposed in mostly linear form and not properly derived from micro foundations as standard dynamic stochastic general equilibrium models, combination of relatively simple structure together with plausible impulse responses makes the model suitable for policy analysis. The model was estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting propertie In addition, since the trading partners of Slovakia are modelled endogenously, we can capture spillovers between the countries and their final impact on the Slovak economy. Enrichment for the fiscal block makes the model applicable also for fiscal policy purposes. Spillovers between the economies are captured by three macroeconomic channels: impact of the external demand on the domestic output, impact of the exchange rates via relative competitiveness and import prices and correlation of the interbank risk premia. On the other hand, government deficit and debt are affecting the economy via fiscal impulse, government bond premium and trend real appreciation. The shock to the level of potential output has little effect on the output gap or interest rates, but it does lead to some decline in ination, probably because of the cross correlation between the error term in the equation for the level of potential output and that in the ination equation.