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Changes in Inflation Dynamics under Inflation Targeting? Evidence from Central European Countries

  • Jaromir Baxa
  • Miroslav Plasil
  • Borek Vasicek

The purpose of this paper is to provide a novel look at the evolution of inflation dynamics in selected Central European (CE) countries. We use the lens of the New Keynesian Phillips Curve (NKPC) nested within a time-varying framework. Exploiting a time-varying regression model with stochastic volatility estimated using Bayesian techniques, we analyze both the closed and open-economy version of the NKPC. The results point to significant differences between the inflation processes in three CE countries. While inflation persistence has almost disappeared in the Czech Republic, it remains rather high in Hungary and Poland. In addition, the volatility of inflation shocks decreased quickly a few years after the adoption of inflation targeting in the Czech Republic and Poland, whereas it remains quite stable in Hungary even after ten years' experience of inflation targeting. Our results thus suggest that the degree of anchoring of inflation expectations varies across CE coutries. In addition, we found some evidence that the 'structural' parameters of the NKPC are somewhat related to the macroeconomic environment.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2012/04.

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Date of creation: May 2012
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Handle: RePEc:cnb:wpaper:2012/04
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