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What is the Appropriate Rate of Disinflation to Be Targeted in the Czech Economy?

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Author Info

  • Lavan Mahadeva

    (Bank of England)

  • Katerina Smidkova

    (Czech National Bank)

Abstract

What is the optimal rate of disinflation to be targeted during transition? This question has attracted more attention under the inflation-targeting regime than under other monetary strategies, because explicit inflation targets are used to anchor expectations. These targets signal what rate of disinflation is targeted by policymakers. Deciding what level of disinflation is least costly in terms of the volatility of important economic variables is not straightforward, since costs depend on monetary transmission in a given economy. In this paper, a small, aggregate, forward-looking model of Czech monetary transmission is used to compare the consequences of different disinflation strategies that are approximated with alternative policy rules. Our results suggest that trajectories with a more linear tendency are superior to trajectories that postpone disinflation or reduce inflation suddenly.

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File URL: http://128.118.178.162/eps/mac/papers/0303/0303015.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0303015.

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Length: 14 pages
Date of creation: 21 Mar 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0303015

Note: Type of Document - ; pages: 14 . WP CNB-SM No 33
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Web page: http://128.118.178.162

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Keywords: disinflation czech inflation targeting;

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  1. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1998. "Tradeoffs between inflation and output-gap variances in an optimizing-agent model," International Finance Discussion Papers 627, Board of Governors of the Federal Reserve System (U.S.).
  2. Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series 1998/16, Center for Financial Studies (CFS).
  3. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
  4. John DiNardo & Mark P. Moore, 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," NBER Working Papers 7328, National Bureau of Economic Research, Inc.
  5. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ales Bulir & Katerina Smídková, 2008. "Striving to Be "Clearly Open" and "Crystal Clear"," IMF Working Papers 08/84, International Monetary Fund.
  2. Viktor Kotlán & David Navrátil, 2003. "Inflation Targeting as a Stabilization Tool: Its Design and Performance in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(5-6), pages 220-242, May.

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