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Undershooting of the Inflation Target in the Czech Republic: The Role of Inflation Expectations

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Abstract

This article addresses the role of the inflation target in inflation expectations using the vector error correction (VECM) and block restriction vector autoregression (VAR) models, based on the monthly data of 1999–2007 in the Czech Republic. The econometric analysis identifies nothing to support the “hypercredible” inflation target hypothesis, under which a 1 pp decrease in the inflation target would be accompanied by a decrease in inflation expectations of more than 1 pp. The results, however, do suggest that the inflation target is a major determinant of inflation expectations, its importance for the formation of inflation expectations surpassing even that of current inflation. Another conclusion is that inflation expectations decrease significantly in response to stricter monetary policy and to a lower inflation target. All in all, the results imply that Czech monetary policy has anchored inflation expectations.

Suggested Citation

  • Roman Horváth, 2008. "Undershooting of the Inflation Target in the Czech Republic: The Role of Inflation Expectations," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(09-10), pages 482-492, December.
    • Handle: RePEc:fau:fauart:v:58:y:2008:i:9-10:p:482-492
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    Cited by:

    1. Horváth, Roman & Komárek, Luboš & Rozsypal, Filip, 2011. "Does money help predict inflation? An empirical assessment for Central Europe," Economic Systems, Elsevier, vol. 35(4), pages 523-536.

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    More about this item

    Keywords

    monetary policy; inflation targeting; undershooting;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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