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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

Author

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  • Roman Horvath

Abstract

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 “hypercredible†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.

Suggested Citation

  • Roman Horvath, 2008. "Reasons of Undershooting the Inflation Target in the Czech Republic: The Role of Inflation Expectations," Occasional Publications - Chapters in Edited Volumes,in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 10, pages 131-142 Czech National Bank, Research Department.
  • Handle: RePEc:cnb:ocpubc:10
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    File URL: http://www.cnb.cz/en/research/research_publications/evaluation_infl_targets/download/evaluation_inf_targets_1998-2007_chap_10.pdf
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    File URL: http://www.cnb.cz/en/research/research_publications/evaluation_infl_targets/index.html
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    References listed on IDEAS

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    1. Bénédicte Vidaillet & V. D'Estaintot & P. Abécassis, 2005. "Introduction," Post-Print hal-00287137, HAL.
    2. Franta, Michal & Saxa, Branislav & Šmídková, Kateřina, 2007. "Inflation persistence: euro area and new EU Member States," Working Paper Series 810, European Central Bank.
    3. Levin, Andrew T. & Piger, Jeremy M. & Natalucci, Fabio M., 2004. "Explicit inflation objectives and macroeconomic outcomes," Working Paper Series 383, European Central Bank.
    4. Tomáš Holub & Jaromír Hurník, 2008. "Ten Years of Czech Inflation Targeting: Missed Targets and Anchored Expectations," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(6), pages 67-86, November.
    5. Ian Babetskii & Fabrizio Coricelli & Roman Horvath, 2007. "Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic," Working Papers 2007/1, Czech National Bank, Research Department.
    6. Tomas Holub, 2008. "Causes of Deviations of Inflation from CNB Targets: An Empirical Analysis," Occasional Publications - Chapters in Edited Volumes,in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 4, pages 47-56 Czech National Bank, Research Department.
    7. Luiz De Mello & Diego Moccero, 2009. "Monetary Policy and Inflation Expectations in Latin America: Long-Run Effects and Volatility Spillovers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1671-1690, December.
    8. Zha, Tao, 1999. "Block recursion and structural vector autoregressions," Journal of Econometrics, Elsevier, vol. 90(2), pages 291-316, June.
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    Citations

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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.

    More about this item

    Keywords

    Inflation expectations; inflation target; Czech National Bank;

    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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