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Transparency and Credibility of Monetary Policy in Transition Countries: The Case of the Czech Republic

  • Roman Matousek
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    This is a study of what asset price can tell us about the evolving credibility of the monetary policy of the Czech National Bank (CNB). From the beginning of the 1990s, several market economies adopted direct inflation targeting (DIT). The focus of our analysis is to examine the effect of changes in the two-week repo rate (the official interest rate) on short and long–maturity market interest rates. Argument relies on information asymmetry and the existence of a stationary stochastic equilibrium with full knowledge of authorities reaction function. Only then will reaction be insignificant. Our research found at short maturities, the coefficients for changes in the official repo rate are lower in the DIT period than in pre-crisis period. The results are significant at the 5%-level. This implies that the hypothesis of no increase in the transparency of monetary policy with the introduction of DIT can be rejected. We found that bond yields and interest rate swap rates of maturities of 5 years and more did not react significantly (at the 5%-level) to official interest rate decisions in the DIT period. This is consistent with the hypothesis that monetary policy was credible both before and after introduction of DIT.

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    Paper provided by Czech National Bank in its series Archive of Monetary Policy Division Working Papers with number 2001/37.

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    Date of creation: Sep 2001
    Date of revision:
    Handle: RePEc:cnb:mpaper:2001/37
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    1. Mishkin, Frederic S., 1990. "Does correcting for heteroscedasticity help?," Economics Letters, Elsevier, vol. 34(4), pages 351-356, December.
    2. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
    3. Kuttner, Kenneth N. & Posen, Adam S., 1999. "Does talk matter after all? Inflation targeting and central bank behavior," CFS Working Paper Series 1999/04, Center for Financial Studies (CFS).
    4. Lars Peter Hansen & Kenneth J. Singleton, 1997. "Efficient Estimation of Linear Asset Pricing Models with Moving-Average Errors," NBER Technical Working Papers 0086, National Bureau of Economic Research, Inc.
    5. Goodhart, Charles A E & Smith, Richard G, 1985. "The Impact of News on Financial Markets in the United Kingdom: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 507-11, November.
    6. Thomas Urich & Paul Wachtel, 1984. "The Effects of Inflation and Money Supply Announcements on Interest Rates," NBER Working Papers 1313, National Bureau of Economic Research, Inc.
    7. Urich, Thomas J & Wachtel, Paul, 1984. " The Effects of Inflation and Money Supply Announcements on Interest Rates," Journal of Finance, American Finance Association, vol. 39(4), pages 1177-88, September.
    8. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
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