Monetary Policy Implications of Financial Frictions in the Czech Republic
As the global economy seems to be recovering from the 2009 financial crisis, we find it desirable to look back and analyze the Czech economy ex post. We work with a Swedish New Keynesian model of a small open economy which embeds financial frictions in light of the financial accelerator literature. Without explicitly modeling the banking sector, this model serves as a tool for understanding how a negative financial shock may spread to the real economy and how monetary policy may react. We use Bayesian techniques to estimate the model parameters to adjust the model structure closer to the evidence stemming from Czech data. Our attention focuses on a set of experiments in which we generate ex post forecasts of the economy prior to the 2009 crisis and illustrate that the monetary policy response to an upcoming crisis implied by the model with financial frictions is stronger on account of an increasing interest rate spread.
JEL codes: C53, E32, E37
Keywords: Bayesian methods, financial frictions
Issued: December 2011
Published as: Ryšánek, J., Tonner, J., Tvrz, S., Vašíček, O. (2012): Monetary Policy Implications of Financial Frictions in the Czech Republic. Czech Journal of Economics and Finance, 62(5), 413–429