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Modelling the Second-Round Effects of Supply-Side Shocks on Inflation

Author

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  • Tibor Hledik

Abstract

Since the introduction of inflation targeting in the Czech Republic in 1998, supply-side factors have had a strong direct influence on CPI inflation on several occasions. This paper uses a small-scale dynamic rational expectations model based on an open-economy version of Fuhrer- Moore-type staggered wage setting to quantify the second-round effects of selected supply-side shocks and of shocks to the nominal exchange rate on wages and subsequently on inflation. In order to analyse the desired reaction of the central bank to these shocks, optimal time-consistent policy rules are derived within the presented New-Keynesian framework. Impulse response analyses are then carried out to demonstrate the model's dynamics under various policy rules corresponding to different loss functions of the central bank. The conclusions presented in the paper suggest that the second-round effects of shocks to import prices and the nominal exchange rate on inflation should not be ignored in practical policy-making.

Suggested Citation

  • Tibor Hledik, 2003. "Modelling the Second-Round Effects of Supply-Side Shocks on Inflation," Working Papers 2003/12, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2003/12
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/wp12-2003.pdf
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    References listed on IDEAS

    as
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    4. Svensson, Lars E. O., 2002. "Inflation targeting: Should it be modeled as an instrument rule or a targeting rule?," European Economic Review, Elsevier, vol. 46(4-5), pages 771-780, May.
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    6. Fuhrer, Jeffrey C., 2010. "Inflation Persistence," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 9, pages 423-486, Elsevier.
    7. Andrew P. Blake, 2000. "Optimality and Taylor Rules," National Institute Economic Review, National Institute of Economic and Social Research, vol. 174(1), pages 80-91, October.
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    9. 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.
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    11. Mervyn A. King, 1996. "How should central banks reduce inflation? conceptual issues," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 53-91.
    12. Blake, Andrew P., 2000. "Optimality and Taylor Rules," National Institute Economic Review, National Institute of Economic and Social Research, vol. 174, pages 80-91, October.
    13. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    14. Batini, Nicoletta & Yates, Anthony, 2003. "Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 283-300, June.
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    Cited by:

    1. Kamil Dybczak & David Vonka & Nico van der Windt, 2008. "The Effect of Oil Price Shocks on the Czech Economy," Working Papers 2008/5, Czech National Bank.
    2. Yuliya Rychalovska, 2007. "Welfare-Based Optimal Monetary Policy in a Two-Sector Small Open Economy," Working Papers 2007/16, Czech National Bank.

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    More about this item

    Keywords

    monetary policy; optimal policy rules; inflation targeting.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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