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

Issue: 3/2017

Adam Pápai

Masaryk University, Faculty of Economics and Administration, Department of Economics, Lipová 41a, 602 00 Brno, mail: papai@mail.muni.cz

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 varia-bles. I also examine the long term impact of the recession in 2009 on the Slovak econ-omy. My findings are as follows. Firstly, based on parameter estimates, I identify signif-icant labor market frictions present in the Slovak Republic. Secondly, my results captur-ing the historical evolution of key macroeconomic variables support the view that the recession in the examined small open economy was mainly caused by shocks originat-ing in the foreign sector. Thirdly, the monetary authority can influence the labor market variables through its transmission channels relatively effectively; and lastly, I discov-ered 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.

DOI: 10.1515/revecp-2017-0015
JEL: J60, E52, E24, C51
Keywords: Unemployment, small open economy, Slovakia, search and matching, rigidity, labor market, DSGE model

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