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The History of Inflation Targeting in the Czech Republic Through the Lens of a Dynamic General Equilibrium Model

Using a dynamic general equilibrium model calibrated for the Czech Republic, we first estimate the impact of structural shocks on the observed realizations of the interest rate and inflation, while the main focus is put on the estimation of monetary policy shocks. These occur whenever monetary policy is not set in accordance with the observed state of the economy and the inflation target. Our results suggest that monetary policy was more restrictive than implied by the observed state of the economy and the inflation target in three periods: 1998Q2–1999Q1, 2001Q3–2003Q2, and 2004Q3–2005Q4. On the contrary, the period from 2003Q3 to 2004Q2 was characterized by relatively loose monetary policy. Based on the assumption that monetary policy focuses on a different inflation target than the officially announced one, we estimate the implicit trajectory of the inflation target for the Czech Republic. This implied target fluctuates between 2 and 3 percent in 2002–2007.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 58 (2008)
Issue (Month): 09-10 (December)
Pages: 454-469

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Handle: RePEc:fau:fauart:v:58:y:2008:i:9-10:p:454-469
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  1. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers 3096, C.E.P.R. Discussion Papers.
  2. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
  3. Kim, Jinill, 2003. "Functional equivalence between intertemporal and multisectoral investment adjustment costs," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 533-549, February.
  4. Tomáš Holub & Jaromír Hurník, 2008. "Ten Years of Czech Inflation Targeting: Missed Targets and Anchored Expectations," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 44(6), pages 67-86, November.
  5. Uhlig, H.F.H.V.S., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 1995-97, Tilburg University, Center for Economic Research.
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