Fulfilment of the Maastricht Inflation Criterion by the Czech Republic: Potential Costs and Policy Options
The purpose of this paper is twofold: firstly, to identify and quantify the potential costs to the Czech economy should fulfilment of the Maastricht inflation criterion (MIC) require disinflation; and secondly, to discuss and suggest policies geared towards minimising the costs related to meeting the MIC. We assume that the real appreciation of the koruna will be about 1.5% during the reference period. Three disinflation simulations are derived from this assumption. The results show that a decline in inflation by 0.5 p.p., 1 p.p. and 1.5 p.p. leads to a cumulative loss of output reaching about 0.5%, 1% and 1.6% respectively of annual potential GDP over a period of four years. The time restriction imposed on the simulations implies that the shorter the time to reach a given lower level of inflation, the higher the initial increase in the interest rate and the more aggressive the policy rule needed. The simulation results and the likely application of the monetary convergence criteria are relevant to the discussion of policy options. We argue that due to the asymmetry of the Maastricht exchange rate criterion (MERC), allowing for nominal appreciation rather than depreciation, fulfilment of the MIC should be superior. Also, we suggest that the main task for the CNB will be to focus on reaching a level of inflation consistent with the presumed level of the MIC sufficiently early before the reference period. This may require a downward adjustment of the CNBÃ¢â‚¬â„¢s inflation point target and an extension of the current policy horizon.
|Date of creation:||Dec 2005|
|Date of revision:|
|Contact details of provider:|| Postal: Na Prikope 28, 115 03 Prague 1|
Phone: 00420 2 2442 1111
Fax: 00420 2 2421 8522
Web page: http://www.cnb.cz/en/research/research_intro/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arratibel, Olga & Rodriguez-Palenzuela, Diego & Thimann, Christian, 2002. "Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective," Working Paper Series 0132, European Central Bank.
- Vladislav Flek & Lenka Markova & Jiri Podpiera, 2002.
"Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?,"
2002/04, Czech National Bank, Research Department.
- Vladislav Flek & Lenka Marková & Jiøí Podpiera, 2003. "Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(3-4), pages 130-153, March.
- Rudebusch, Glenn D & Svensson, Lars E O, 1998.
"Policy Rules for Inflation Targeting,"
CEPR Discussion Papers
1999, C.E.P.R. Discussion Papers.
- Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc.
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
- Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers 637, Stockholm University, Institute for International Economic Studies.
- Hondroyiannis, George & Lazaretou, Sophia, 2004.
"Inflation persistence during periods of structural change: an assessment using Greek data,"
Working Paper Series
0370, European Central Bank.
- George Hondroyiannis & Sophia Lazaretou, 2007. "Inflation persistence during periods of structural change: an assessment using Greek data," Empirica, Springer, vol. 34(5), pages 453-475, December.
- George Hondroyiannis & Sophia Lazaretou, 2004. "Inflation Persistence during Periods of Structural Change: An Assessment Using Greek Data," Working Papers 13, Bank of Greece.
- federico ravenna & fabio natalucci, 2003.
"the road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries,"
Computing in Economics and Finance 2003
227, Society for Computational Economics.
- Fabio M. Natalucci & Federico Ravenna, 2002. "The road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," International Finance Discussion Papers 741, Board of Governors of the Federal Reserve System (U.S.).
- Martin Cincibuch & Jiri Podpiera, 2004.
"Beyond Balassa - Samuelson: Real Appreciation in Tradables in Transition Countries,"
2004/09, Czech National Bank, Research Department.
- Martin Cincibuch & Jiří Podpiera, 2006. "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(3), pages 547-573, 07.
- Katerina SmÃdkovÃ¡ & Ales Bulir, 2005.
"Exchange Rates in the New EU Accession Countries; What Have We Learned from the Forerunners?,"
IMF Working Papers
05/27, International Monetary Fund.
- Bulir, Ales & Smidkova, Katerina, 2005. "Exchange rates in the new EU accession countries: What have we learned from the forerunners?," Economic Systems, Elsevier, vol. 29(2), pages 163-186, June.
- Ales Bulir & Katerina Smidkova, 2004. "Exchange Rates in the New EU Accession Countries: What Have We Learned from the Forerunners," Working Papers 2004/10, Czech National Bank, Research Department.
- Angeloni, Ignazio & Ehrmann, Michael, 2004.
"Euro area inflation differentials,"
Working Paper Series
0388, European Central Bank.
- Buiter, Willem H. & Grafe, Clemens, 2002. "Anchor, Float or Abandon Ship: Exchange Rate Regimes for Accession Countries," CEPR Discussion Papers 3184, C.E.P.R. Discussion Papers.
- Vladimir Benacek & Ladislav Prokop & Jan A. Visek, 2003. "Determining Factors of the Czech Foreign Trade Balance: Structural Issues in Trade Creation," Working Papers 2003/03, Czech National Bank, Research Department.
- Lubos Komarek & Zdenek Cech, Roman Horvath, 2003. "ERM II Membership - the View of the Accession Countries," Working Papers 2003/11, Czech National Bank, Research Department.
- Cincibuch, Martin & Vávra, David, 2000. "Towards the EMU: A Need For Exchange Rate Flexibility?," Transition Economics Series 17, Institute for Advanced Studies.
- Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank).
- Tomas Holub & Martin Cihak, 2003. "Price Convergence: What Can the Balassa-Samuelson Model Tell Us?," Working Papers 2003/08, Czech National Bank, Research Department.
- Ian Babetskii, 2004. "EU Enlargement and Endogeneity of some OCA Criteria: Evidence from the CEECs," Working Papers 2004/02, Czech National Bank, Research Department.
- Peter Backé & Christian Thimann & Olga Arratibel & Oscar Calvo-Gonzalez & Arnaud Mehl & Carolin Nerlich, 2004. "The acceding countries’ strategies towards ERM II and the adoption of the euro - an analytical review," Occasional Paper Series 10, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:cnb:rpnrpn:2005/04. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Babecky)
If references are entirely missing, you can add them using this form.