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Modelling transmission mechanism of monetary policy in the Czech Republic

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Author Info

  • Lavan Mahadeva

    (Bank of England)

  • Katerina Smidkova

    (Czech National Bank)

Abstract

In December 1997, the Czech Republic became the first transitional economy to adopt an inflation-targeting (IT) framework. This paper addresses two important topics: optimal inflation-targeting horizon and optimal speed of disinflation. A small, aggregate, forward-looking model of the Czech monetary transmission was calibrated and estimated. Stochastic simulations were used to compare consequences of different forecast horizons and different targeted disinflation paths. Our first conclusion is that the optimal targeting horizon is probably less than a year. Secondly, postponing the initial disinflation does not imply significant gains in terms of lower output volatility or a smaller external imbalance.

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File URL: http://128.118.178.162/eps/mac/papers/0402/0402032.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0402032.

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Length: 28 pages
Date of creation: 27 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0402032

Note: Type of Document - ; pages: 28. The paper has been published in Mahadeva, Sterne (ed.) Monetary policy framework in a global context, Routledge, London. See http://www.bankofengland.co.uk/ccbs/publication
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Web page: http://128.118.178.162

Related research

Keywords: Inflation targeting; Transmission; transition; Simulations;

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References

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  1. Peter N. Ireland, 1996. "Stopping inflations, big and small," Working Paper 96-01, Federal Reserve Bank of Richmond.
  2. Urbain, J-P., 1991. "On Weak Exogeneity in Error Correction Models," Papers 9103, Liege - Centre de Recherches Economiques et Demographiques.
  3. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
  4. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
  5. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
  6. Michael Woodford, 1994. "Nonstandard Indicators for Monetary Policy: Can Their Usefulness Be Judged from Forecasting Regressions?," NBER Chapters, in: Monetary Policy, pages 95-115 National Bureau of Economic Research, Inc.
  7. Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, vol. 107(440), pages 178-91, January.
  8. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
  9. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 1998. "Tradeoffs Between Inflation and Output-Gap Variances in an Optimizing-Agent Model," Seminar Papers 650, Stockholm University, Institute for International Economic Studies.
  10. Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters, in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc.
  11. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  12. DiNardo, J. & Moore, M.P., 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," Papers 99-00-04, California Irvine - School of Social Sciences.
  13. Grubb, David B. & Jackman, Richard & Layard, Richard, 1983. "Wage rigidity and unemployment in OECD countries," European Economic Review, Elsevier, vol. 21(1-2), pages 11-39.
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Citations

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Cited by:
  1. Katerina Smidkova, 2003. "Methods Available to Monetary Policy Makers to Deal with Uncertainty," Macroeconomics 0310002, EconWPA.
  2. Federico Ravenna & Giovanni Lombardo, 2009. "Trade and Optimal Monetary Policy," 2009 Meeting Papers 784, Society for Economic Dynamics.
  3. federico ravenna & fabio natalucci, 2003. "the road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," Computing in Economics and Finance 2003 227, Society for Computational Economics.
  4. Gabriel Sterne, 2002. "Inflation Targets in a Global Context," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 2, pages 023-078 Central Bank of Chile.
  5. Golinelli, Roberto & Rovelli, Riccardo, 2005. "Monetary policy transmission, interest rate rules and inflation targeting in three transition countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 183-201, January.
  6. 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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