Reasons of Undershooting the Inflation Target in the Czech Republic: The Role of Inflation Expectations
In: Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007
This article addresses the role of the inflation target with respect to inflation expectations developments using the vector error correction (VECM) and block restriction vector autoregression (VAR) models, based on the monthly data of 1999-2007. The econometric analysis performed has not identified any grounds in support of the â€œhypercredibleâ€ inflation target hypothesis, under which a 1 pp decrease would be accompanied by a decrease of inflation expectations by more than 1 pp. The results however suggest that the inflation target is a major determinant of inflation expectations, its importance for creating the inflation expectations surpassing even that of the current inflation development. Another conclusion is that inflation expectations decrease significantly in response to a stricter monetary policy and to the lower inflation target. On the overall, the results imply that the monetary policy has anchored the inflation expectations.
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