The Great Recession in the Non-EMU Visegrád Countries: A Nonlinear DSGE Model with Time-Varying Parameters

Inspired by the radically different course and aftermath of the Great Recession in the Polish economy and the economies of the Czech Republic and Hungary in contrast to their comparable economic development before the crisis, we investigate the structural stability of these three Central European economies in that period. The question of structural stability is essential for proper application of a standard DSGE model in a given economy. In the case of significant structural changes, these should be incorporated explicitly into the model structure in order to avoid misleading results. Each of the three economies is represented by a nonlinear small open economy dynamic stochastic general equilibrium model with a financial accelerator. First, the DSGE models are estimated using Bayesian methods under the assumption of constant structural parameters. Then the development of time-varying structural parameters is estimated by means of a particle filter using second order approximation of a nonlinear DSGE model. We find several statistically significant structural changes in the Czech and Polish economies. According to the time-varying impulse response functions, the structural changes during the Great Recession curbed the negative impacts of the adverse exogenous shocks to a certain extent in the Czech and Polish economies. By contrast, the vulnerability of the Hungarian economy further increased.