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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)

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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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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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Related research
Keywords: Inflation targeting; Transmission; transition; Simulations;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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.:
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    Other versions:
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    Other versions:
  3. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  4. Grubb, Dennis & Jackman, Richard & Layard, Richard, 1983. "Wage rigidity and unemployment in OECD countries," European Economic Review, Elsevier, vol. 21(1-2), pages 11-39. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
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  7. 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.
  8. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  9. 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. [Downloadable!]
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  11. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation, Yale University, revised Apr 1989. [Downloadable!]
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  13. 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. [Downloadable!]
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Cited by:
(explanations, 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.)

  1. Lavan Mahadeva & Gabriel Sterne, . "The role of short-run inflation targets and forecasts in disinflation," Bank of England working papers 167, Bank of England. [Downloadable!]
  2. Fabio M. Natalucci & Federico Ravenna, 2002. "The road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," International Finance Discussion Papers 741, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Gabriel Sterne, 2001. "Inflation Targets in a Global Context," Working Papers Central Bank of Chile 114, Central Bank of Chile. [Downloadable!]
  4. Katerina Smidkova, 2003. "Methods Available to Monetary Policy Makers to Deal with Uncertainty," Macroeconomics 0310002, EconWPA. [Downloadable!]
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