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Direct Inflation Targeting and Nominal Convergence: The Czech Case

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Author Info
Roman Matoušek ()
Anita Taci ()

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Abstract

This study analyses the impact of direct inflation targeting (DIT) on monetary policy credibility in the Czech Republic, as evidenced by asset prices. It examines the effect of changes in the two-week repo rate (the official interest rate) on short and long–term market interest rates. It assumes the asymmetry of information and the existence of a stationary stochastic equilibrium with full knowledge of authorities reaction function. We find that at short maturities, the coefficients for changes in the official repo rate are lower in the DIT period than in the pre-crisis period. This implies that the hypothesis of no increase in the transparency of monetary policy with the introduction of DIT can be rejected. We find that bond yields and interest rate swap rates with maturities of 5 years and longer did not react significantly to official interest rate decisions in the DIT period. This is consistent with the hypothesis that monetary policy was credible both before and after introduction of DIT. Copyright Kluwer Academic Publishers 2003

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File URL: http://hdl.handle.net/10.1023/A:1023935120371
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Publisher Info
Article provided by Springer in its journal Open Economies Review.

Volume (Year): 14 (2003)
Issue (Month): 3 (July)
Pages: 269-283
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Handle: RePEc:kap:openec:v:14:y:2003:i:3:p:269-283

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Related research
Keywords: direct inflation targeting (DIT); interest rate; repo operations;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
  2. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  3. Daniel C. L. Hardy, 1998. "Anticipation and Surprises in Central Bank Interest Rate Policy: The Case of the Bundesbank," IMF Working Papers 98/43, International Monetary Fund.
  4. Kenneth N. Kuttner & Adam S. Posen, 1999. "Does talk matter after all? Inflation targeting and central bank behavior," Staff Reports 88, Federal Reserve Bank of New York. [Downloadable!]
  5. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lucjan T. Orlowski, 2005. "Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro," William Davidson Institute Working Papers Series wp754, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  2. Lucjan T Orlowski, 2005. "Exchange Rate Risk and Convergence to the Euro," Macroeconomics 0501034, EconWPA. [Downloadable!]
  3. Mariusz Jarmuzek & Lucjan T. Orlowski & Artur Radziwill, 2005. "Monetary Policy Transparency in the Inflation Targeting," Macroeconomics 0502025, EconWPA. [Downloadable!]
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