Modelling the Second-Round Effects of Supply-Side Shocks on Inflation
AbstractSince the introduction of inflation targeting in the Czech Republic in 1998, supply-side factors have had a strong direct influence on CPI inflation on several occasions. This paper uses a small-scale dynamic rational expectations model based on an open-economy version of Fuhrer- Moore-type staggered wage setting to quantify the second-round effects of selected supply-side shocks and of shocks to the nominal exchange rate on wages and subsequently on inflation. In order to analyse the desired reaction of the central bank to these shocks, optimal time-consistent policy rules are derived within the presented New-Keynesian framework. Impulse response analyses are then carried out to demonstrate the model's dynamics under various policy rules corresponding to different loss functions of the central bank. The conclusions presented in the paper suggest that the second-round effects of shocks to import prices and the nominal exchange rate on inflation should not be ignored in practical policy-making.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2003/12.
Date of creation: Dec 2003
Date of revision:
Contact details of provider:
Postal: Na Prikope 28, 115 03 Prague 1
Phone: 00420 2 2442 1111
Fax: 00420 2 2421 8522
Web page: http://www.cnb.cz/en/research/research_intro/
More information through EDIRC
monetary policy; optimal policy rules; inflation targeting.;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-MAC-2005-04-16 (Macroeconomics)
- NEP-MON-2005-04-16 (Monetary Economics)
- NEP-TRA-2005-04-16 (Transition Economics)
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.:
- Blake, Andrew P & Westaway, Peter F, 1996.
"Credibility and the Effectiveness of Inflation Targeting Regimes,"
The Manchester School of Economic & Social Studies,
University of Manchester, vol. 64(0), pages 28-50, Suppl..
- Andrew P. Blake and Peter F. Westaway, . "Credibility and the effectiveness of inflation targeting regimes," NIESR Discussion Papers 85, National Institute of Economic and Social Research.
- Jeff Fuhrer & George Moore, 1993.
Federal Reserve Bank of San Francisco, issue Mar.
- Mervyn King, 1996. "How should central banks reduce inflation? - Conceptual issues," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 25-52.
- Andrew G. Haldane & Nicoletta Batini, 1998.
"Forward-Looking Rules for Monetary Policy,"
NBER Working Papers
6543, National Bureau of Economic Research, Inc.
- Taylor, John B, 1980.
"Aggregate Dynamics and Staggered Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 88(1), pages 1-23, February.
- Batini, Nicoletta & Yates, Anthony, 2003.
" Hybrid Inflation and Price-Level Targeting,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 35(3), pages 283-300, June.
- Goodfriend, Marvin, 1991.
"Interest rates and the conduct of monetary policy,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 34(1), pages 7-30, January.
- 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.
- Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination In Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
- Mervyn King, 1996. "How should central banks reduce inflation? conceptual issues," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 53-91.
- Yuliya Rychalovska, 2007. "Welfare-Based Optimal Monetary Policy in a Two-Sector Small Open Economy," Working Papers 2007/16, Czech National Bank, Research Department.
- Kamil Dybczak & David Vonka & Nico van der Windt, 2008. "The Effect of Oil Price Shocks on the Czech Economy," Working Papers 2008/5, Czech National Bank, Research Department.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Babecky).
If references are entirely missing, you can add them using this form.