Bayesian Estimation of DSGE Models

Thesis is dedicated to Bayesian Estimation of DSGE Models. Firstly, the history of DSGE modeling is outlined as well as development of this macroeconometric field in the Czech Republic and in the rest of the world. Secondly, the comprehensive DSGE framework is described in detail. It means that everyone is able to specify or estimate arbitrary DSGE model according to this framework. Thesis contains two empirical studies. The first study describes derivation of the New Keynesian DSGE Model and its estimation using Bayesian techniques. This model is estimated with three different Taylor rules and the best performing Taylor rule is identified using the technique called Bayesian comparison. The second study deals with development of the Small Open Economy Model with housing sector. This model is based on previous study which specifies this model as a closed economy model. I extended this model by open economy features and government sector. Czech Republic is generally considered as a small open economy and these extensions make this model more applicable to this economy. Model contains two types of households. The first type of consumers is able to access the capital markets and they can smooth consumption across time by buying or selling financial assets. These households follow the permanent income hypothesis (PIH). The other type of household uses rule of thumb (ROT) consumption, spending all their income to consumption. Other agents in this economy are specified in standard way. Outcomes of this study are mainly focused on behavior of house prices. More precisely, it means that all main outputs as Bayesian impulse response functions, Bayesian prediction and shock decomposition are focused mainly on this variable. At the end of this study one macro-prudential experiment is performed. This experiment comes up with answer on the following question: is the higher/lower Loan to Value (LTV) ratio better for the Czech Republic? This experiment is very conclusive and shows that level of LTV does not affect GDP. On the other hand, house prices are very sensitive to this LTV ratio. The recommendation for the Czech National Bank could be summarized as follows. In order to keep house prices less volatile implement rather lower LTV ratio than higher.