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Inflation targeting in the Czech Republic

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Author Info

  • Miroslav Hrncir

    (Czech National Bank)

  • Katerina Smidkova

    (Czech National Bank)

Abstract

This paper presents the Czech approach to inflation targeting (IT) that was co-authored by the authors of the paper. The IT strategy was introduced by the Czech National Bank in 1997. The paper gives an overview of history of monetary policy in the Czech Republic and reasons for a change in strategy. Similarly to the countries that adopted the inflation targeting, the Czech republic lost its nominal anchor when letting domestic currency to float. Monetary targeting was not an option due to weaker links between both the price level and money supply a well as money supply and interest rates. In the next section, the paper describes the problems of implementation of inflation targeting in transitional country and solutions adopted by the Czech National Bank. Specifically, the issue of regulated prices is discussed and definition of the net inflation index. Also, the strategy of desinflation and its representation by a set of two targets for different time horizons is analyzed. The overview of the first months of decision-making process under the new strategy shows that it promotes both internal as well as external transparency of monetary policy. In the last section, several lessons are derived for inflation targeters in transitional countries from the Czech experience. For example, the importance on society preferences towards price and currency stability is emphasized. Also, the conflict between a necessity of anchoring expectations and longer lags of monetary policy is explained. It is concluded that despite the problems, the inflation targeting provides significant gains for transitional economy.

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File URL: http://128.118.178.162/eps/mac/papers/0402/0402031.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0402031.

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Length: 12 pages
Date of creation: 27 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0402031

Note: Type of Document - ; pages: 12. The paper has been published in Mahadeva, Sterne (ed.) Monetary policy framework in a global context, Routledge, London.
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Web page: http://128.118.178.162

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Keywords: inflation targeting czech;

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Cited by:
  1. Marjan Petreski, 2011. "A Markov Switch to Inflation Targeting in Emerging Market Peggers with a Focus on the Czech Republic, Poland and Hungary," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 57-75.
  2. Lavan Mahadeva & Gabriel Sterne, 2002. "The role of short-run inflation targets and forecasts in disinflation," Bank of England working papers 167, Bank of England.

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