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Modelling transmission mechanism of monetary policy in the Czech Republic

Author

Listed:
  • Lavan Mahadeva

    (Bank of England)

  • Katerina Smidkova

    (Czech National Bank)

Abstract

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.

Suggested Citation

  • Lavan Mahadeva & Katerina Smidkova, 2004. "Modelling transmission mechanism of monetary policy in the Czech Republic," Macroeconomics 0402032, University Library of Munich, Germany.
    • 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
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    References listed on IDEAS

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    Cited by:

    1. Golinelli, Roberto & Rovelli, Riccardo, 2005. "Monetary policy transmission, interest rate rules and inflation targeting in three transition countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 183-201, January.
    2. Fabio M. Natalucci & Federico Ravenna, 2002. "The road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," International Finance Discussion Papers 741, Board of Governors of the Federal Reserve System (U.S.).
    3. Lavan Mahadeva & Gabriel Sterne, 2002. "The role of short-run inflation targets and forecasts in disinflation," Bank of England working papers 167, Bank of England.
    4. Gabriel Sterne, 2002. "Inflation Targets in a Global Context," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.),Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 2, pages 023-078, Central Bank of Chile.
    5. Katerina Smidkova, 2003. "Methods Available to Monetary Policy Makers to Deal with Uncertainty," Macroeconomics 0310002, University Library of Munich, Germany.

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    More about this item

    Keywords

    Inflation targeting; Transmission; transition; Simulations;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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