Output gap in the Czech economy: DSGE approach

Issue: 2/2019

This paper presents three measures of the output gap estimated by a dynamic stochastic general equilibrium model of the Czech economy. We argue that the most plausible description of the business cycle provides the output gap defined as a devia-tion from a flexible price level of output, which is generated solely by permanent growth shocks. Our model shows that 2006-2008 overheating of the economy and the following 2008-2009 slump can be largely attributed to development in a world econo-my and export and import sectors, while the 2012-2013 recession was caused mainly by a combination of adverse domestic demand and cost shocks.

DOI: 10.2478/revecp-2019-0008
JEL: E47, E32, C32
Keywords: small open economy, output gap, labour market, DSGE model