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Modelling transmission mechanism of monetary policy in the Czech Republic

  • Lavan Mahadeva

    (Bank of England)

  • Katerina Smidkova

    (Czech National Bank)

In December 1997, the Czech Republic became the first transitional economy to adopt an inflation-targeting (IT) framework. This paper addresses two important topics: optimal inflation-targeting horizon and optimal speed of disinflation. A small, aggregate, forward-looking model of the Czech monetary transmission was calibrated and estimated. Stochastic simulations were used to compare consequences of different forecast horizons and different targeted disinflation paths. Our first conclusion is that the optimal targeting horizon is probably less than a year. Secondly, postponing the initial disinflation does not imply significant gains in terms of lower output volatility or a smaller external imbalance.

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Paper provided by EconWPA in its series Macroeconomics with number 0402032.

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Length: 28 pages
Date of creation: 27 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0402032
Note: Type of Document - ; pages: 28. The paper has been published in Mahadeva, Sterne (ed.) Monetary policy framework in a global context, Routledge, London. See http://www.bankofengland.co.uk/ccbs/publication
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters, in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc.
  2. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  3. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
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  6. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  7. Erceg, C.J. & Henderson, D.W. & Levin, A.T., 1998. "Tradeoffs Between Inflation and Output-Gap Variances in an Optimizing-Agent Model," Papers 650, Stockholm - International Economic Studies.
  8. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
  9. Peter N. Ireland, 1996. "Stopping inflations, big and small," Working Paper 96-01, Federal Reserve Bank of Richmond.
  10. John DiNardo & Mark P. Moore, 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," NBER Working Papers 7328, National Bureau of Economic Research, Inc.
  11. Urbain, J-P., 1991. "On Weak Exogeneity in Error Correction Models," Papers 9103, Liege - Centre de Recherches Economiques et Demographiques.
  12. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
  13. Michael Woodford, 1994. "Nonstandard Indicators for Monetary Policy: Can Their Usefulness Be Judged from Forecasting Regressions?," NBER Chapters, in: Monetary Policy, pages 95-115 National Bureau of Economic Research, Inc.
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