DSGE model with government sector and inflation targeting: Structural changes of Czech economy in a period of recession

In the paper we compare the structure of the Czech economy in two periods: before and during the Great Recession. This small open economy is represented by two variations of a medium scale nonlinear dynamic stochastic model of a general equilibrium with fiscal and monetary policy. This model framework is based on a Portuguese approach introduced by Almeida (2009). We decided to use this model, because it captures the important features of the Czech economy in a reasonable detail. Since this concept was primarily constructed for the estimation of an economy in a currency union, we had to add a Taylor type monetary policy and a nominal exchange rate into the model. Both model variations are estimated with the use of bayesian techniques with the same priors, in order to analyse structural changes linked to the Great Recession. With the use of the shock decomposition we will analyse the impact of the exogenous shocks on the development of the Czech output. Especially, we will focus on the effects of the fiscal policy in the period of the Great Recession and the European debt crisis.