Exchange Rate Management and Inflation Targeting: Modeling the Exchange Rate in Reduced-Form New Keynesian Models

This paper introduces a strategy for modeling the exchange rate when the monetary authority targets inflation while also managing the exchange rate using interventions. It does so in the framework of a standard reduced-form New Keynesian model of monetary transmission used in many institutions for research, forecasting, and monetary policy analysis. We propose a microfounded modification to the UIP condition which allows for modeling of informal exchange rate bands. Our modeling strategy is useful for most hybrid IT regimes, including those with imperfect control over market interest rates.IT regimes, New Keynesian model, exchange rate, UIP

Cobb-Douglas Production Function: The Case of a Converging Economy

The Cobb-Douglas production function is often used to analyse the supply-side performance and measurement of a country’s productive potential. This functional form, however, includes the assumption of a constant share of labor in output, which may be too restrictive for a converging country. For example, labor share in the Czech Republic gradually increased over the last decade. In this paper, we test whether this fact renders the application of the Cobb-Douglas production function unreliable for the Czech economy. The authors apply a more general form of production function and allow labor share to develop according to the empirical data. For the period 1995–2005, the authors do not find significant difference between the calculation of the supply side of the Czech economy by the Cobb-Douglas production function and a more general production function.potential output, production function, labor share, total factor productivity

Labor-Market Performance and Macroeconomic Policy: Time-Varying NAIRU in the Czech Republic (in English)

During the second half of the 1990s, the Czech economy experienced a sharp increase in the unemployment rate. The authors attempt to determine whether this was caused by structural changes, worsening labor-market performance, or by the changing business-cycle position. This has direct implications for both monetary and fiscal policy. The authors use NAIRU (non-accelerating inflation rate of unemployment) estimates using time-varying NAIRU. The estimates indicate that the NAIRU increased between 1996 and 2002 by approximately 1.5 percent. Estimated increases in the NAIRU can be associated with the worsening of labor-market efficiency.forward-looking expectations, maximum-likelihood methods, non-accelerating inflation rate of unemployment, time-varying NAIRU

Central Bank Losses and Economic Convergence

This paper discusses central bank losses and develops a formal framework for assessing the sustainability of its balance sheet. Analyzing the consequences of economic convergence in depth, it emphasizes the role played by the risk premium and equilibrium real exchange rate appreciation. A closed-form comparative-static analysis and also numerical solutions of the future evolution of the central bank’s own capital are presented. Applying this framework to an example of a converging economy, namely the Czech Republic, the authors find that the Czech National Bank should be able to repay its accumulated loss in about 15 years without any transfer from public budgets.balance sheet, central bank, economic convergence, monetary policy, real appreciation, risk premium, seigniorage, transition

The History of Inflation Targeting in the Czech Republic Through the Lens of a Dynamic General Equilibrium Model

Using a dynamic general equilibrium model calibrated for the Czech Republic, we first estimate the impact of structural shocks on the observed realizations of the interest rate and inflation, while the main focus is put on the estimation of monetary policy shocks. These occur whenever monetary policy is not set in accordance with the observed state of the economy and the inflation target. Our results suggest that monetary policy was more restrictive than implied by the observed state of the economy and the inflation target in three periods: 1998Q2–1999Q1, 2001Q3–2003Q2, and 2004Q3–2005Q4. On the contrary, the period from 2003Q3 to 2004Q2 was characterized by relatively loose monetary policy. Based on the assumption that monetary policy focuses on a different inflation target than the officially announced one, we estimate the implicit trajectory of the inflation target for the Czech Republic. This implied target fluctuates between 2 and 3 percent in 2002–2007.monetary policy shock, dynamic general equilibrium model, Kalman filtration

Supply-side economics and economic level

This article analyses the impact of different types of taxes on economic growth. Taking into account inter-temporal substitution we develop an economic model originally stemming from the Ramsey model. Using the dynamic optimization we search the balanced trajectories of consumption and capital stock to the new steady state after tax adjustment. The results show the negative impact of tax on capital on economic growth. The impact of consumption tax and payroll tax depends on the concrete parameters of the utility function of the representative agent, exactly on agent's evaluation of consumption and leisure. The influence of low taxes on economic growth may be positive, while the influence of high taxes may become negative. The analysis shows that there might be the identical economic growth for two different tax levels.supply side economics, Ramsey model, working time curve, steady states curve

Fiscal Consolidation in General Equilibrium Framework (the case of the Czech Republic)

Within the non-stochastic dynamic general equilibrium model framework this paper examines the implications of alternative fiscal consolidation programs for small open economy. The calibrated model enables realistically quantify the impact of the deficit financing and fiscal consolidation on consumption and saving of households, investment of firms and thereby on the capital stock and real interest rates. Through the interest rate link the impact of deficit financing and fiscal consolidation on cyclical and long-term properties of monetary policy set-up can be observed. Several fiscal consolidations were simulated in order to demonstrate the comparative statics and differences in dynamic paths of above mentioned variables.general equilibrium model, fiscal consolidation

The Maastricht inflation criterion:"saints" and "Sinners"

This study is about the Maastricht inflation criterion, designed in the early 1990s to bring "high-inflation" EU countries into line with "low-inflation" countries prior to the introduction of the euro, poses challenges for both new EU member countries and the European Central Bank

The monetary transmission mechanism in the Czech republic (evidence from VAR analysis)

This paper analyses the monetary policy transmission mechanism using VAR models – the most widely used empirical methodology for analyzing the transmission mechanism in the Czech economy. Using the VAR methodology, the paper tries to evaluate the effects of an exogenous shock to monetary policy

Potential Output in the Czech Republic: A Production Function Approach

This paper deals with the Czech economy supply side performance from the macroeconomic point of view. In order to evaluate the supply side behaviour we calculate the potential output dynamic path and contribution of its particular determinants using the production function method. The results show that the potential output growth was rather slow around 2 per cent. This implies that e. g. even 3 per cent growth can cause macroeconomic imbalances. Increase of the non-accelerating-inflation-rate of unemployment (NAIRU), weak growth of the capital stock and weak growth of total factor productivity appear to be the reasons for the constrained ability of the Czech economy to grow steadily and converge to EU level.total factor productivity, production function, potential output, NAIRU, capital stock