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The History of Inflation Targeting in the Czech Republic through Optic of a Dynamic General Equilibrium Model

In: Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007

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Author Info
Jarek Hurnik
Ondra Kamenik
Jan Vlcek

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Abstract

Using a dynamic general equilibrium model calibrated for the Czech Republic and the method of Kalman filtration we first estimate impact of structural shocks on the observed realization of interest rate and inflation, while the main focus is put on the estimation of monetary policy shocks. These occur whenever monetary policy is not set in accordance to the observed state of the economy and inflation target. Our results suggest that monetary policy was more restrictive than implied by the observed state of the economy and inflation target in three periods: from the second quarter of 1998 till the first quarter of 1999, from the third quarter of 2001 till the second quarter of 2003 and finally from the third quarter of 2004 till the end of 2005. In contrary, in period from the third quarter of 2003 till the second quarter of 2004 we identify looser monetary policy. Consequently and based on the assumption that monetary policy does not make mistakes, but focuses on a different inflation target than the officially announced one, we estimate an implicit trajectory of the inflation target. Inflation target that well fits the observed behaviour of the central bank is inflation targets fluctuating between 2 and 3 % since the year 2002.

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This chapter was published in: Katerina Smidkova (ed.) Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, , chapter 8, pages 102-116, 2008.

This item is provided by Czech National Bank, Research Department in its series Occasional Publications - Chapters in Edited Volumes with number 08.

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Related research
This chapter was published in the following book, which is listed on IDEAS:
Juraj Antal & Zuzana Antonicova & Jan Babecky & Michal Hlavacek & Tomas Holub & Roman Horvath & Jarek Hurnik & Ondra Kamenik & Karel Musil & Jiri Podpiera & Lubos Ruzicka & Michal Skorepa & Katerina S, 2008. "Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number 01 edited by Katerina Smidkova. [Downloadable!]
Keywords: monetary policy shock; dynamic general equilibrium model; Kalman filtration;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
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  1. Viktor Kotlan & David Navratil, 2003. "Inflation Targeting as a Stabilisation Tool: Its Design and Performance in the Czech Republic," Macroeconomics 0310006, EconWPA. [Downloadable!]
  2. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October. [Downloadable!] (restricted)
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  4. John Geweke, 1999. "Computational Experiments and Reality," Computing in Economics and Finance 1999 401, Society for Computational Economics.
  5. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
  6. King, Robert G & Watson, Mark W, 1996. "Money, Prices, Interest Rates and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 35-53, February. [Downloadable!] (restricted)
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  7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
  8. Kim, Jinill, 2003. "Functional equivalence between intertemporal and multisectoral investment adjustment costs," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 533-549, February. [Downloadable!] (restricted)
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