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Undershooting of the Inflation Target in the Czech Republic: The Role of Inflation Expectations

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Abstract

This article addresses the role of the inflation target in inflation expectations using the vector error correction (VECM) and block restriction vector autoregression (VAR) models, based on the monthly data of 1999–2007 in the Czech Republic. The econometric analysis identifies nothing to support the “hypercredible” inflation target hypothesis, under which a 1 pp decrease in the inflation target would be accompanied by a decrease in inflation expectations of more than 1 pp. The results, however, do suggest that the inflation target is a major determinant of inflation expectations, its importance for the formation of inflation expectations surpassing even that of current inflation. Another conclusion is that inflation expectations decrease significantly in response to stricter monetary policy and to a lower inflation target. All in all, the results imply that Czech monetary policy has anchored inflation expectations.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 58 (2008)
Issue (Month): 09-10 (December)
Pages: 482-492

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Handle: RePEc:fau:fauart:v:58:y:2008:i:9-10:p:482-492

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Keywords: monetary policy; inflation targeting; undershooting;

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References

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  1. Tomáš Holub & Jaromír Hurník, 2008. "Ten Years of Czech Inflation Targeting: Missed Targets and Anchored Expectations," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 44(6), pages 67-86, November.
  2. Zha, Tao, 1999. "Block recursion and structural vector autoregressions," Journal of Econometrics, Elsevier, vol. 90(2), pages 291-316, June.
  3. Taner Yigit, 2007. "Inflation Targeting : An Indirect Approach to Assess the Direct Impact," Departmental Working Papers 0706, Bilkent University, Department of Economics.
  4. Levin, Andrew T. & Natalucci, Fabio M. & Piger, Jeremy M., 2004. "Explicit inflation objectives and macroeconomic outcomes," Working Paper Series 0383, European Central Bank.
  5. Marco Vega & Diego Winkelried, 2005. "Inflation Targeting and Inflation Behavior: A Successful Story?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  6. Luiz De Mello & Diego Moccero, 2009. "Monetary Policy and Inflation Expectations in Latin America: Long-Run Effects and Volatility Spillovers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1671-1690, December.
  7. Franta, Michal & Saxa, Branislav & Šmídková, Katerina, 2007. "Inflation persistence: euro area and new EU Member States," Working Paper Series 0810, European Central Bank.
  8. Tomáš Holub, 2008. "Causes of Deviations from the CNB’s Inflation Targets: An Empirical Analysis," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(09-10), pages 425-433, December.
  9. Oecd, 2006. "Monetary Policy and Inflation Expectations in Latin America: Long-run Effects and Volatility Spillovers," OECD Economics Department Working Papers 518, OECD Publishing.
  10. repec:nbr:nberwo:12876 is not listed on IDEAS
  11. Ian Babetskii & Fabrizio Coricelli & Roman Horváth, 2007. "Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic," Working Papers IES 2007/22, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007.
  12. Johnson, David R., 2002. "The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1521-1538, November.
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