Financial frictions during the period of the global economic recession: A DSGE model of the Czech economy

This paper deals with analysis of financial market frictions of Czech economy using DSGE model framework. The methodology is borrowed from Alpanda, Koetze, Woglom (2010) who based their model on Justiniano, Preston (2009) and specifics of the financial market during global economic crisis are examined. This model features staggered wages and prices, incomplete pass-through of exchange rate and incomplete international asset markets. Czech economy from year 1996 till the end of 2010 is analyzed by DSGE model with financial accelerator using shock decompositions. This gives us a prove about impact of risk premium and financial accelerator on the output. Furthermore, it determines also effect of shocks on observed variables. The method of recursive estimations is used. Thus, we are able to study quantity of financial accelerator and other parameters which are now changing across the time. Those parameters change the structure of model and influence development of the economy.