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Monetary Policy Implications of Financial Frictions in the Czech Republic

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Abstract

Having witnessed the consequences of the financial crisis for the real economy, we find it desirable to look back and analyze the Czech economy ex post. We work with a Swedish New Keynesian model of a small open economy which embeds financial frictions in light of the financial accelerator literature. Without explicitly modeling the banking sector, this model serves as a tool for understanding how a negative financial shock may spread to the real economy and how monetary policy may react. We use Bayesian techniques to estimate the model parameters to adjust the model structure closer to the evidence stemming from Czech data. Our attention focuses on a set of experiments in which we generate ex post forecasts of the economy prior to the 2009 crisis and illustrate that the monetary policy response to an upcoming crisis implied by the model with financial frictions is stronger on account of an increasing interest rate spread.

Suggested Citation

  • Jakub Rysanek & Jaromir Tonner & Stanislav Tvrz & Osvald Vasicek, 2012. "Monetary Policy Implications of Financial Frictions in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(5), pages 413-429, November.
    • Handle: RePEc:fau:fauart:v:62:y:2012:i:5:p:413-429
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    Cited by:

    1. Jan Žácek, 2019. "Financial Variables in a Policy Rule: Does It Bring Macroeconomic Benefits?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(2), pages 122-148, April.
    2. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    3. repec:cnb:ocpubv:rb11/2 is not listed on IDEAS
    4. Stanislav Tvrz & Osvald Vasicek, 2016. "The Great Recession in the Non-EMU Visegrád Countries: A Nonlinear DSGE Model with Time-Varying Parameters," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(3), pages 207-235, June.
    5. repec:cnb:ocpubv:rb10/2 is not listed on IDEAS
    6. repec:prg:jnlpep:v:2015:y:2015:i:5:id:513:p:1-22 is not listed on IDEAS
    7. Tvrz Stanislav & Vašíček Osvald, 2016. "Structural changes in the Czech, Slovak and euro area economies during the Great Recession," Review of Economic Perspectives, Sciendo, vol. 16(4), pages 297-336, December.
    8. David Svacina, 2018. "Devaluation with Exchange rate Floor in a Small Open Economy," Working Papers IES 2018/06, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2018.
    9. Tomas Adam & Miroslav Plasil, 2014. "The Impact of Financial Variables on Czech Macroeconomic Developments: An Empirical Investigation," Working Papers 2014/11, Czech National Bank.
    10. repec:cnb:ocpubv:rb12/1 is not listed on IDEAS
    11. Michl Aleš, 2019. "Ten Years Later: Lessons for DSGE Builders and Czech Policy Makers," Review of Economic Perspectives, Sciendo, vol. 19(3), pages 159-174, September.
    12. repec:cnb:ocpubc:geo2020/9 is not listed on IDEAS
    13. Vít Pošta & Zdeněk Pikhart, 2015. "Financial Risk and Real Variables: Evidence Based on a SVAR Analysis of the Czech Economy," Prague Economic Papers, Prague University of Economics and Business, vol. 2015(5), pages 516-537.
    14. repec:cnb:ocpubv:rb12/2 is not listed on IDEAS
    15. Miroslav Hloušek, 2016. "The Empirical Implications of the Zero Lower Bound on the Interest Rate: The Case of the Czech Economy," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 64(2), pages 603-616.
    16. repec:prg:jnlpep:v:preprint:id:513:p:1-22 is not listed on IDEAS
    17. repec:cnb:ocpubv:rb11/1 is not listed on IDEAS

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    More about this item

    Keywords

    Bayesian methods; financial frictions;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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