Grant detail

GA UK (principal investigator) - Euro adoption in the Czech Republic: Would it have stabilized the economy during the recent financial crisis? (submitted in November 2014)

Principal investigator: Mgr. David Svačina
Collaborators: Ing. Aleš Maršál M.A.
Description: Main macroeconomic costs and benefits of euro adoption come from fixing the exchange rate and giving up independent monetary policy. Recent financial crisis showed impact of these could be substantial. Combination of low inflation, wage rigidities and no possibility of exchange rate depreciation as well as too restrictive monetary policy of ECB at the beginning of the crisis resulted in more severe economic contraction of periphery countries. In our research we will investigate how would have euro adoption in 2007 affected the Czech Republic's economy during financial crisis. Unlike any of the previous studies, we will, first, conduct ex post analysis - compare actual path of economic development with the simulated on inside eurozone. Second, we will focus on time of extreme economic volatility when potential structural differences and asymmetry of shocks could have the greatest impact. Third, we will use most up-to-date methodology, New Keynesian DSGE model with financial frictions estimated by Bayesian inference. In the second year of the grant, we will accommodate our model to a different context of developing country and estimate how would have evolved Mexican economy during financial crisis if it had fixed its currency do the U.S. dollar and adopted its monetary policy.
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End date: 2016
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