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What is the Appropriate Rate of Disinflation to Be Targeted in the Czech Economy?

Author

Listed:
  • Lavan Mahadeva

    (Bank of England)

  • Katerina Smidkova

    (Czech National Bank)

Abstract

What is the optimal rate of disinflation to be targeted during transition? This question has attracted more attention under the inflation-targeting regime than under other monetary strategies, because explicit inflation targets are used to anchor expectations. These targets signal what rate of disinflation is targeted by policymakers. Deciding what level of disinflation is least costly in terms of the volatility of important economic variables is not straightforward, since costs depend on monetary transmission in a given economy. In this paper, a small, aggregate, forward-looking model of Czech monetary transmission is used to compare the consequences of different disinflation strategies that are approximated with alternative policy rules. Our results suggest that trajectories with a more linear tendency are superior to trajectories that postpone disinflation or reduce inflation suddenly.

Suggested Citation

  • Lavan Mahadeva & Katerina Smidkova, 2003. "What is the Appropriate Rate of Disinflation to Be Targeted in the Czech Economy?," Macroeconomics 0303015, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0303015
    Note: Type of Document - ; pages: 14 . WP CNB-SM No 33
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    File URL: http://econwpa.repec.org/eps/mac/papers/0303/0303015.pdf
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    References listed on IDEAS

    as
    1. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    2. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1998. "Tradeoffs between inflation and output-gap variances in an optimizing-agent model," International Finance Discussion Papers 627, Board of Governors of the Federal Reserve System (U.S.).
    3. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    4. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters,in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
    5. DiNardo, J. & Moore, M.P., 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," Papers 99-00-04, California Irvine - School of Social Sciences.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Viktor Kotlán & David Navrátil, 2003. "Inflation Targeting as a Stabilization Tool: Its Design and Performance in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(5-6), pages 220-242, May.
    2. Kateøina Šmídková & Aleš Bulíø, 2007. "Striving to Be “Clearly Open” and “Crystal Clear”: Monetary Policy Communication of the CNB," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(11-12), pages 540-557, December.

    More about this item

    Keywords

    disinflation czech inflation targeting;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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