Long-run relations in a small open economy of the Czech Republic and the Slovak Republic

Abstract

A small open economy is highly dependent on foreign environments. This article investigates equilibrium relations between a small open economy and its foreign trade partners. Based on long-run relationships developed by Garratt et al. (2003) a structural model for the Czech Republic (CR) and Slovak Republic (SR) is constructed for period 2002Q1 to 2015Q4. As most of the macroeconomic variables are nonstationary, the Cointegrated Vector Autoregressive Approach (CVAR) is used for empirical analysis. The following five long-run equilibrium relations are examined: relative purchasing power parity, uncovered interest rate parity, Fisher inflation parity, money market equilibrium, and output relation. The estimation results of the long-run relations confirmed similarities between these economies.