MUSE: MONETARY UNION AND SLOVAK ECONOMY MODEL

In this paper, we employ the Bayesian method together with the calibration approach to parameterise a medium-scale two-country dynamic stochastic general equilibrium model of Slovakia and the Eurozone. Parameters controlling the steady state of the model are calibrated to match the ratios of a few selected variables to their empirical counterparts. The remaining parameters are estimated via the Bayesian method. Since Slovakia has been a Euro area member for only two years, we need the model to operate under the two different monetary regimes – autonomous monetary policy regime and monetary union regime. This feature enables us to estimate the model parameters in the case of independent monetary policy and subsequently simulate impacts of various structural shocks on the Slovak economy as a part of the monetary union. At the end of the paper, we present the impulse-response functions of the model to selected structural shocks.