Impact of Labour and Growth Shocks in Small Open Economy: DSGE Approach

This paper aims to identify the impacts of the labour market shocks for economic growth, and the impact of the growth shocks for the labour market variables. We use a small open economy dynamic stochastic general equilibrium model with real wage rigidity and involuntary unemployment. The model is estimated by using a Bayesian approach and 16 observed variables from 2001Q1 to 2019Q4 for the Czech economy. The main results are as follows: (i) The labour supply shocks contributed to the economic growth and induced disinflDlationary pressure during 2010-2017 period, but are the barrier of growth from 2018 onwards; (ii) Productivity and domestic cost shocks are the dominant determinants of real wage growth; (iii) The effect of the domestic demand shock on the unemployment is twice as large as the foreign demand shock.