IDEAS home Printed from https://ideas.repec.org/p/wsr/wpaper/y2008i018.html
   My bibliography  Save this paper

(How) Will the Euro Affect Inflation in the Czech Republic? A contribution to the current debate

Author

Listed:
  • Tomás Slacík

Abstract

In the present study we analyse relevant macro- and microeconomic forces driving inflation in the Czech Republic with a particular focus on how these channels are likely to change in the wake of euro adoption. We employ an ARDL model combined with the Bayesian Model Averaging technique. In order to carry out this analysis, we also estimate the time-varying natural rate of interest purged from the risk premium. Our results suggest that the costs arising from the discontinuation of nominal trend appreciation of the koruna after euro adoption are likely to be rather low. In contrast, a low inflation environment and a harmonization of the business cycles between the Czech Republic and the euro area are essential for ensuring that inflation hikes will remain limited after the euro adoption. The fulfilment of the Maastricht inflation criterion should not be enforced by policy measures that would artificially reduce inflation temporarily. The potential inflationary effect of the changeover cannot be eliminated altogether but it may well be substantially reduced by applying best practices based on the experience of current euro area participants.

Suggested Citation

  • Tomás Slacík, 2008. "(How) Will the Euro Affect Inflation in the Czech Republic? A contribution to the current debate," FIW Working Paper series 018, FIW.
    • Handle: RePEc:wsr:wpaper:y:2008:i:018
    as

    Download full text from publisher

    File URL: http://www.fiw.ac.at/fileadmin/Documents/Publikationen/Working_Paper/N_018-slacik.pdf
    File Function: full text
    Download Restriction: none
    ---><---

    References listed on IDEAS

    as
    1. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
    2. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    3. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
    4. Mario J Crucini & Mototsugu Shintani, 2002. "Persistence in Law-of-One-Price Deviations: Evidence From Micro-Price Data," NajEcon Working Paper Reviews 506439000000000019, www.najecon.org.
    5. Balázs Egert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," CESifo Working Paper Series 2127, CESifo.
    6. Jesús Crespo Cuaresma & Balázs Égert & Maria Antoinette Silgoner, 2007. "Price Level Convergence in Europe: Did the Introduction of the Euro Matter?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 100-113.
    7. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2006. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 1103-1131.
    8. Paolo Giovane & Roberto Sabbatini, 2008. "Perceived and measured inflation after the launch of the euro: explaining the gap in Italy," Springer Books, in: Paolo Giovane & Roberto Sabbatini (ed.), The Euro, Inflation and Consumer’s Perceptions, chapter 1, pages 13-49, Springer.
    9. Brůha, Jan & Podpiera, Jiří, 2007. "Transition economy convergence in a two-country model: implications for monetary integration," Working Paper Series 740, European Central Bank.
    10. Manfred Fluch & Helmut Stix, 2007. "The Development of Euro Prices – Subjective Perception and Empirical Facts," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 55-84.
    11. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    12. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    13. repec:onb:oenbwp:y:2006:i:1:b:1 is not listed on IDEAS
    14. Crespo Cuaresma, Jesús & Slacik, Tomas, 2009. "On the determinants of currency crises: The role of model uncertainty," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 621-632, December.
    15. Michael Reutter & Hans-Werner Sinn, 2000. "The Minimum Inflation Rate for Euroland," CESifo Working Paper Series 377, CESifo.
    16. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    17. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Economic Change and Restructuring, Springer, vol. 31(2), pages 185-204, June.
    18. repec:icf:icfjmo:v:05:y:2007:i:4:p:84-102 is not listed on IDEAS
    19. Darvas, Zsolt, 2001. "Exchange rate pass-through and real exchange rate in EU candidate countries," Discussion Paper Series 1: Economic Studies 2001,10, Deutsche Bundesbank.
    20. repec:zbw:bofitp:2006_008 is not listed on IDEAS
    21. R. Golinelli & R. Orsi, 2001. "Hungary and Poland," Working Papers 424, Dipartimento Scienze Economiche, Universita' di Bologna.
    22. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.
    23. Horváth, Roman, 2009. "The time-varying policy neutral rate in real-time: A predictor for future inflation?," Economic Modelling, Elsevier, vol. 26(1), pages 71-81, January.
    24. repec:ezo:ezppap:wp09 is not listed on IDEAS
    25. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    26. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
    27. repec:onb:oenbwp:y:2007:i:2:b:1 is not listed on IDEAS
    28. Coricelli, Fabrizio & Égert, Balázs & MacDonald, Ronald, 2006. "Monetary transmission mechanism in Central and Eastern Europe: gliding on a wind of change," BOFIT Discussion Papers 8/2006, Bank of Finland Institute for Emerging Economies (BOFIT).
    29. Maritta Paloviita & Matti Virén, 2005. "The role of expectations in the inflation process in the euro area," Macroeconomics 0508031, University Library of Munich, Germany.
    30. Fabrizio CORICELLI & Bostjan JAZBEC & Igor MASTEN, 2004. "Exchange Rate Pass-Through in Acceding Countries: The Role of Exchange Rate Regimes," Economics Working Papers ECO2004/16, European University Institute.
    31. Yang, Yuhong, 2007. "Prediction/Estimation With Simple Linear Models: Is It Really That Simple?," Econometric Theory, Cambridge University Press, vol. 23(1), pages 1-36, February.
    32. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 171, European Central Bank.
    33. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    34. Fabrizio Coricelli & Balázs Égert & Ronald MacDonald, 2006. "Monetary Transmission in Central and Eastern Europe: Gliding on a Wind of Change," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 44-87.
    35. Thomas A. Eife, 2006. "Price setting behaviour and price setting regulations at the euro changeover," Bank of Estonia Working Papers 2006-06, Bank of Estonia, revised 12 Oct 2006.
    36. Mr. Stanley Fischer & Ms. Ratna Sahay & Mr. Carlos A. Végh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 2002/197, International Monetary Fund.
    37. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    38. Jan Bruha & Jiri Podpiera, 2006. "Transition Economy Convergence in a Two-Country Model," Computing in Economics and Finance 2006 154, Society for Computational Economics.
    39. Luc Aucremanne & Marianne Collin & Thomas Stragier, 2007. "Assessing the Gap between Observed and Perceived Inflation in the Euro Area : Is the Credibility of the HICP at Stake ?," Working Paper Research 112, National Bank of Belgium.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Balázs Égert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," Working Papers 138, Oesterreichische Nationalbank (Austrian Central Bank).
    2. N/A, 2007. "Real Convergence, Price Level Convergence and Inflation in Europe," Bruegel Working Papers 267, Bruegel.
    3. repec:onb:oenbwp:y::i:138:b:1 is not listed on IDEAS
    4. Jimborean, Ramona, 2013. "The exchange rate pass-through in the new EU member states," Economic Systems, Elsevier, vol. 37(2), pages 302-329.
    5. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Economic Change and Restructuring, Springer, vol. 31(2), pages 185-204, June.
    6. Jesús Cuaresma & Ernest Gnan, 2007. "The natural rate of interest: which concept? which estimation method? which policy conclusions?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(4), pages 667-688.
    7. Jesus Crespo-Cuaremsa & Ernest Gnan & Doris Ritzberger-Gruenwald, 2003. "Searching for the natural rate of interest: a euro area perspective," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 60-80, Bank for International Settlements.
    8. Yuriy Gorodnichenko & Linda Tesar, 2005. "A Re-Examination of the Border Effect," NBER Working Papers 11706, National Bureau of Economic Research, Inc.
    9. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2010. "Welfare-maximizing monetary policy under parameter uncertainty," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 129-143.
    10. Ladislav Wintr & Paolo Guarda & Abdelaziz Rouabah, 2005. "Estimating the natural interest rate for the euro area and Luxembourg," BCL working papers 15, Central Bank of Luxembourg.
    11. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(2), pages 185-204, June.
    12. repec:onb:oenbwp:y::i:84:b:1 is not listed on IDEAS
    13. Andrés, Javier & David López-Salido, J. & Nelson, Edward, 2009. "Money and the natural rate of interest: Structural estimates for the United States and the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 758-776, March.
    14. García Solanes José, 2008. "Real Exchange Rate Appreciation in Central and Eastern European Countries. Why the Balassa-Samuelson Effect Does Not Explain the Whole Story," Working Papers 2010100, Fundacion BBVA / BBVA Foundation.
    15. Fabrizio Coricelli & Balázs Égert & Ronald MacDonald, 2006. "Monetary Transmission in Central and Eastern Europe: Gliding on a Wind of Change," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 44-87.
    16. Beirne, John & Bijsterbosch, Martin, 2011. "Exchange rate pass-through in central and eastern European EU Member States," Journal of Policy Modeling, Elsevier, vol. 33(2), pages 241-254, March.
    17. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Non-linear effects of the U.S. Monetary Policy in the Long Run," MPRA Paper 57770, University Library of Munich, Germany.
    18. Horváth, Roman, 2009. "The time-varying policy neutral rate in real-time: A predictor for future inflation?," Economic Modelling, Elsevier, vol. 26(1), pages 71-81, January.
    19. Axel A. Weber & Wolfgang Lemke & Andreas Worms, 2008. "How useful is the concept of the natural real rate of interest for monetary policy?," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 32(1), pages 49-63, January.
    20. Balázs Égert & Ronald MacDonald, 2006. "Monetary Transmission Mechanism in Transition Economies: Surveying the Surveyable," MNB Working Papers 2006/5, Magyar Nemzeti Bank (Central Bank of Hungary).
    21. Bank for International Settlements, 2003. "Monetary policy in a changing environment," BIS Papers, Bank for International Settlements, number 19.
    22. Alexius, Annika & Welz, Peter, 2006. "Can a time-varying equilibrium real interest rate explain the excess sensitivity puzzle?," Working Paper Series 2006:20, Uppsala University, Department of Economics.

    More about this item

    Keywords

    Euro adoption; inflation; natural rate of interest; Bayesian model averaging; Czech Republic;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsr:wpaper:y:2008:i:018. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.