The goal of this paper is to identify and compare the most important changes in the structure of the Czech economy, as a small open economy with independent monetary policy, the Slovak economy, as a small open economy that entered monetary union, and the economy of the euro area, which has a common monetary policy, during the turbulent period of the Great Recession, the subsequent anaemic recovery and recent disinflationary period. Structural changes are identified with the help of nonlinear dynamic stochastic models of general equilibrium with time-varying parameters. The model parameters are estimated using Bayesian methods and a nonlinear particle filter. The results confirm the similarity of the Czech and Slovak economies and show that in certain respects the structure of the Czech economy might be closer to that of the euro area than that of Slovakia. The time-varying estimates reveal many similarities between the parameter changes in the Czech economy and those in the euro area. In Slovakia, the situation during the Great Recession was dominated by the country’s adoption of the euro, which caused large deviations in its Calvo parameters.

Small open economies within the European Union can be extensively influenced by the utilization of the structural and investment EU funds. Even more so if they are eligible to draw from the Cohesion Fund targeted at the less developed EU countries. In many of these countries, we observe an EU-funds cycle that causes spikes in total investment as the programming period draws near to its end, and a decline after the new programming period begins. As the share of EU-funded public investment and the public investment financed from domestic sources varies highly over time, we decided to explore the differences in the transmission of these two types of public investment shocks into the real economy. We use a version of the EAGLE model calibrated for the Slovak economy integrated in the euro area and extended with EU funds mechanisms. We find that if the part of the total investment that is funded from domestic sources comes from an increase in taxes, the EU-funded investment delivers larger improvement in real GDP. The difference is especially striking for investment funded by an increase of social security contributions paid by firms. Debt-financed public investment delivers virtually the same results irrespective of whether it is co-financed from EU funds or not.