Estimating Output Gap in the Czech Republic

This contribution deals with an estimation of output gap in the Czech economy using a New Keynesian DSGE model. In this model the output gap is defined as a deviation of actual output from its flexible-price equilibrium level. The flexible-price equilibrium output is economically efficient and maximizes household welfare. These estimates are thus useful indicators for monetary policy. The model is estimated using Bayesian methods. The model data fit and prior sensitivity is also carried out. The results indicate that the model is able to describe Czech data quite well. The estimated output gap is more volatile than traditional measure (HP filter), but the periods of booms and recessions are almost the same.