A DSGE Model of Slovakia with Frictional Labor Market and Monetary Regime Switch

Abstract

Abstract:The aim of this paper is to examine the dynamical and structural characteristics of Slovakia using a dynamic stochastic general equilibrium model augmented with search and matching mechanisms and other forms of frictions. I implement a switching mechanism to account for the monetary regime change in Slovakia in 2009. My focus lies in the investigation of labor market rigidities that affect the macroeconomic variables. I also examine the long term impact of the recession in 2009 on the Slovak economy. My findings are as follows. Firstly, based on parameter estimates, I identify significant labor market frictions present in the Slovak Republic. Secondly, my results capturing the historical evolution of key macroeconomic variables support the view that the recession in the examined small open economy was mainly caused by shocks originating in the foreign sector. Thirdly, the monetary authority can influence the labor market variables through its transmission channels relatively effectively; and lastly, I discovered that the recession decreased the Slovak economy's flexibility. While the results of estimations on two sub-samples are quite similar for most of the structural parameters, an increase in price and wage stickiness is observable.

A DSGE model with partial euroization: the case of the Macedonian economy

“…The latter result confirms the survey based evidence regarding the practice of Macedonian firms for adjusting wages to inflation at a low level as provided by Ramadani and Naumovski (2015). The parameter is similar to the estimate made by Jakab and Vilagi (2008) for Hungary (0.17-0.19) and the one of de Walque et al (2017) for the euro area (0.24), but lower than the ones estimated for: Romania (0.41) by Copaciu et al (2015), Slovenia (0.6) by Kustrin (2019) or Slovakia (0.69) as reported in Papai (2017). The estimates of most of the elasticities of substitution are also close to their prior values, implying that data is not very informative about the posterior values of these parameters.…”

“…The estimated parameter for the (internal) consumption habit persistence parameter, b, has a posterior mean value of 0.68, close to the prior one and reflecting the relatively low volatility of private consumption among GDP components. The value is relatively similar with the ones estimated by Jakab and Vilagi (2008) for Hungary (0.65), Papai (2017) for Slovakia (0.73) and Argov et al (2012) for Israel (0.71). On the other hand, a higher estimate (0.94) is obtained for Slovenia in the study of Kustrin (2019), while Copaciu et al (2015) find a relatively low estimate for Romania (0.38), the latter also featuring a much more volatile consumption series.…”