Impact of Asymmetric Shocks and Structural Differences between the Czech economy and Euro Area 12

Asymmetric shocks and structural differences are regarded as the main causes of a potential suboptimality of common monetary policy. In this paper I present a new approach for analysis of asymmetric shocks and structural differences between two countries, using historical shock decomposition. An advantage of this method is that it jointly examines the impacts of asymmetric shocks and structural differences. This method covers adjustment processes to asymmetric shocks as well as the frequency with which the shocks occur. I demonstrate this method using a New Keynesian DSGE model of two economies, presented in Kolasa [14], which I estimate on the data of the Czech economy and Euro Area 12. The model is estimated with Bayesian techniques using seven key macro economic variables in both economies: GDP, consumption, investment, prices, real wages, nominal interest rate and internal ex change rate defined as prices of non-tradable goods relative to prices of tradable goods. The behavior of the model is driven by seven structural shocks in both economies:tradable and non-tradable productivity shocks, labor supply shocks, investment efficiency shocks, consumption preference shocks, governments pending shocks and monetary policy shocks. The model allows for structural parameters to differ between economies and for correlations between corresponding shocks in both economies. Results suggest that impacts of structural shocks are more correlated than it seems from estimated correlations between shocks alone. The largest correlations are between impacts of shocks on inflations and interest rates. I also find that an evolution of variables in the Czech economy is relatively more influenced by shocks in productivity while the evolution of variables in Euro Area 12 is relatively more influenced by investment efficiency shocks. It also seems that the monetary policy of the ECB is relatively more discretionary than the monetary policy of the CNB, nevertheless it seems that the CNB follows the ECB in their discretionary policy.