Abstract
Since the reforms in the early 1990s, Czech Republic, Hungary, Estonia, Latvia, Lithuania, Poland, Slovakia and Slovenia have experienced economic booms. This paper first summarizes the empirical regularities for the key aggregate real sector variables in the eight countries: GDP, consumption, investment, employment, real exchange rate, real wage, external balance as well as employment and economic activity in traded and nontraded sectors. We then develop and calibrate a twosector DGE small open economy model and show that it can account for most of the economic adjustments in early post-reform years. Empirical studies have found rapid traded sector productivity growth in Central and Eastern European countries over the last decade. When traded sector productivity growth is added to the model, it captures the development in all key real sector variables during the post-reform period.