The Convergence of a Transition Economy: The Case of the Czech Republic
In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run paths of a converging emerging market economy. The model’s novel feature is the inclusion of quality investment to the standard framework of applied general equilibrium two-country models. This extension proves crucial ingredient for explanation of the trend in real exchange rate. Using a case study calibration of productivity and deep parameters for the Czech economy we demonstrate the ability of the model to consistently explain dynamics in key macroeconomic variables that are essential inputs for commonly used ‘gap models’ in monetary policy practice.
Keywords: Convergence, monetary policy, two-country modeling.
Issued: September 2007
Published as: Brůha, J., Podpiera, J. and S. Polák (2010): The Convergence Dynamics of a Transition Economy: The Case of Czech Republic, Economic Modelling, pp. 116-124.
Download: CNB WP No. 3/2007 (pdf, 4.4 MB)