F41 - Open Economy MacroeconomicsReturn

The article focuses on various aspects of specification, estimation and identification of vector autoregression (VAR) models. Key VAR-specific topics of verification of an estimated model are also covered, as well as the differences between a standard (unrestricted) and structural VAR model. Subsequently, we address theoretical properties and practical aspects of impulse response functions (IRFs) as calculated upon estimated VAR models. Topics such as Cholesky decomposition (CHD), orthogonalised and generalised IRFs are discussed. Properties of VAR models are compared against alternative econometric modelling tools, such as simultaneous equation models and dynamic stochastic general equilibrium (DSGE) models. The article is supplemented with an illustrative example: on an aggregated EMU-wide level, we estimate a VAR (2) model for real GDP, CPI and PPI inflation. IRFs are calculated using two different CHD orderings and compared to generalised IRFs. We find the IRFs from our illustrative model to be very robust against the chosen IRF calculation method and against equation ordering changes.

The paper deals with the possible impact of the 2008-2009 financial and economic crisis on the potential output in the Czech Republic. Given the general difficulty in sketching out all the consequences of the crisis itself, the article is primarily focused on the labour market, which is regarded as an important driving force in terms of potential output fall or its growth slowdown. First, principal reasons why the potential output could have been hit by the 2008-2009 crisis are discussed in detail. The paper then analyzes a number of transmission mechanisms through which potential output could be generally impacted by severe recessions. Further, the output gap of the Czech Republic is estimated and a potential output development is drawn up. Finally, an approximate impact of the crisis on the potential product through the labour market is demonstrated. The results show that the potential output in the Czech Republic has been partially and temporarily affected in volume. This is specifically due to an adverse long-term unemployment and, to a much lesser extent, employment behaviour, in both cases seemingly in relation to the recent crisis. Likewise, Okun's law has been found to be relatively weak in the case of the Czech economy, thus further supporting the "hysteresis explanation". However, such a drop in potential output will likely not persist in the long run, provided that appropriate economic policies - in particular aiming at re-integration of long-term unemployed/discouraged workers and an increase in the employment and participation rates - are implemented.

The paper presents both theoretical and an empirical analysis of factors influencing the prices of non-tradable goods and services in the Czech economy. The analysis discusses the development of the real exchange rate of the Czech koruna and quantifies the size of the real exchange rate appreciation of the Czech currency in the period 1993-2007 as a result of the domestic price development in the tradable and non-tradable sectors. The paper mathematically derives a relationship between the prices of non-tradable goods and services and the real exchange rate based on a traditional aggregate base. It also defines the basic determinants of the prices of non-tradable goods and services while emphasizing the basic distinctions between these price determinants for non-tradable and tradable goods and services. The econometric part of the paper is based on VAR models, cointegration analysis, and vector error correction models. The empirical verification is carried out with the Czech economic data covering the period 1996-2007.

David Hume formulated the oldest theory of balance of payment adjustment mechanism in 1752. In his model foreign trade is sensitive to the difference between the home and foreign price levels and that is why it is also called price - specie - flow mechanism. Hume, likewise the whole generation of classical political economists coming after him, failed to see the impact of then strong British economy on economic variables of the rest of the world and in effect he developed a model for a small economy. Although the authorship of the quantitative monetary equation is ascribed to him, Hume did not represent pure monetarism, i.e. neutrality of money. He was well aware of the transition period, during which a change in money stock affect the real economics variables. For this reason it is necessary to abandon the constant real product model. Variability of the real product in the presented models makes it possible to create different stable levels of money stock and the real product in accordance with the initial conditions. The authors are of the opinion that the balance of payment adjustment mechanism can thus be source of instability of the real sector of the economy.

In this paper we bring the survey of the contemporaneous research on the behaviour of exchange rate and so called exchange rate disconnect puzzle. We have introduced several directions in which research on this object could be developed. They are basically concerned with the monopolistically competition, which allows for exchange rate fluctuations from its long run equilibrium level, so that purchasing power parity condition doesn't holds. The alternative approach incorporates heterogeneous agents' setup.