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The CNB's Policy Decisions - Are They Priced in by the Markets?

  • David Navratil
  • Viktor Kotlan

This paper asks to what extent the market prices in the future monetary policy decisions of the Czech National Bank (CNB), how this policy predictability has evolved over time, and whether the change in the central bank's forecasting methodology in mid-2002 had any impact. Using a sample up to mid-2004, the results are threefold. First, three-quarters of the CNB's decisions were in line with medium-term money market expectations. Notwithstanding this relatively high predictability of CNB policy, the average mistake in the expectations was biased upwards: over the entire IT period the market has priced in a higher repo rate than has actually turned out to be the case. Second, our analysis shows that the period in which forecasts with an active monetary policy (unconditional forecasts) have been used is characterized by smaller 'surprises' of the money market. On the one hand, this may be connected with a change in the CNB's communication of the forecast, including releases of verbal comments on the interest rate trajectory that is consistent with the outlook. On the other hand, it may reflect a different economic environment in the second stage of IT in the Czech Republic. Third, we analyze whether there is convergence or divergence between the central bank's forecast-consistent interest rate trajectory and market forward rates. We show that in most cases market rates converged toward the CNB's interest rate trajectory after the publication of the forecast.

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Paper provided by Czech National Bank, Research Department in its series Research and Policy Notes with number 2005/01.

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Date of creation: Feb 2005
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Handle: RePEc:cnb:rpnrpn:2005/01
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  1. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
  2. Pérez Quirós, Gabriel & Sicilia, Jorge, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Paper Series 0192, European Central Bank.
  3. Roman Matousek, 2001. "Transparency and Credibility of Monetary Policy in Transition Countries: The Case of the Czech Republic," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 4(2), pages 91-104, November.
  4. Kevin Ross, 2002. "Market Predictability of ECB Monetary Policy Decisions; A Comparative Examination," IMF Working Papers 02/233, International Monetary Fund.
  5. Michael Woodford, 2004. "Inflation targeting and optimal monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 15-42.
  6. Richard Podpiera, 2000. "Czech Financial Market Efficiency in Light of Recent Interest Rate Cuts," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 50(5), pages 270-282, May.
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