How Inflation Targeters (Can) Deal with Uncertainty

The paper argues that a well-designed methodology for dealing with uncertainty improves the quality of interest-rate decisions taken by inflation targeters. A well-planned methodology is also more easily communicated to the general public, and the subsequent greater transparency makes inflation targeting more efficient. Therefore, it is relevant for an inflation targeter to consult with or consider information from other inflation targeters, researchers, and relevant decision makers when designing or improving upon their methodology. The paper also summarizes the results of a recent survey on methods for dealing with uncertainty for inflation targeters. The results are presented in a framework designed in line with decision analysis. The paper summarizes which methods are commonly used by inflation targeters and what lessons can be learnt from economic research and from decision makers.inflation targeting, uncertainty, decision analysis, robustness analysis

Striving to Be “Clearly Open” and “Crystal Clear”: Monetary Policy Communication of the CNB

The Czech National Bank has a respectable track record in terms of its policy actions and the corresponding inflation outturns. The authors analyze its main communication tools – inflation targets, inflation forecasts, verbal assessments of the inflation risks contained in quarterly inflation reports, and the voting within the CNB Board – to assess clarity of communication. They find that these tools provided a very clear message in about three out of every four observations in our 2001–2005 sample.transparency, communication, monetary policy, Czech National Bank

Transmisní mechanizmus mìnové politiky na poèátku 3. tisíciletí

Tøi dùležité výzvy: zavádìní nových strategií mìnové politiky, vypozorované odlišnosti v prùbìhu finanèních krizí mezi rozvinutými a rozvíjejícími se ekonomikami a vznik EMU ? napomohly v poslední dekádì posunout úvahy o transmisním mechanizmu mìnové politiky. Došlo k jasnìjšímu vymezení tøí fází transmise. Do centra pozornosti se dostaly i ty transmisní kanály, které pùvodnì zdùrazòovány nebyly. Rozdílný vliv jednotlivých kanálù v rùzných zemích se stal zøetelnìjším a s ním i potøeba opatrnosti pøi zobecòování poznatkù o transmisním mechanizmu jedné ekonomiky pro více zemí. Pøehled teoretických východisek úvah o transmisním mechanizmu mìnové politiky, jeho jednotlivých fázích a transmisních kanálech dává základ k ilustraci rozdílností v transmisním mechanizmu národních ekonomik pomocí výsledkù mezinárodních empirických studií. Specifická pozornost je vìnována problémùm, kterým èelí v oblasti transmisního mechanizmu rozvíjející se ekonomiky.transmise mìnové politiky; rozvíjející se ekonomiky

Central Banks’ Voting Records and Future Policy

We assess whether the voting records of central bank boards are informative about future monetary policy. First, we specify a theoretical model of central bank board decision-making and simulate the voting outcomes. Three different versions of model are estimated with simulated data: 1) democratic, 2) consensual and 3) opportunistic. These versions differ in the degree of informational influence between the chairman and other board members influence prior to the voting. The model shows that the voting pattern is informative about future monetary policy provided that the signals about the optimal policy rate are noisy and that there is sufficient independence in voting across the board members, which is in line with the democratic version. Next, the model predictions are tested on real data on five inflation targeting countries (the Czech Republic, Hungary, Poland, Sweden and the United Kingdom). Subject to various sensitivity tests, it is found that the democratic version of the model corresponds best to the real data and that in all countries the voting records are informative about future monetary policy, making a case for publishing the records.monetary policy, voting record, transparency, collective decision-making.

The Role of Inflation Persistence in the Inflation Process in the New EU Member States

The aim of this paper is to compare inflation persistence between the New Member States (NMS) that joined the European Union in 2004 and 2007 and selected euro area members. If the levels of inflation persistence between the two groups are different, the NMS may encounter problems with fulfilling the Maastricht criterion on inflation and – after entering the euro area – with inflation divergence. We argue that the specific economic situation of the NMS in the last 15 years necessitates careful selection of inflation persistence measures. Two measures are estimated. The first one is based on a simple univariate statistical model of inflation with a time-varying mean. The second one assumes that inflation follows a fractionally integrated process and measures inflation persistence within an ARFIMA model. Statistical tests suggest that the model with a time-varying mean is preferable to the ARFIMA model for almost all countries. The estimation results show that inflation persistence is not an issue for all of the NMS. On the one hand, Bulgaria, Cyprus, the Czech Republic, Malta, Romania, and Slovakia exhibit persistence levels similar to those in the selected euro area countries. On the other hand, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovenia encounter a problem with high persistence stemming from both high intrinsic and high expectations-based inflation persistence.inflation persistence, new member states, time-varying mean, central bank credibility, ARFIMA model, Bayesian estimation, Kalman filter

Which Exchange-Rate Regime in the EMU Accession Period: An Empirical Analysis

This study is the second part of larger empirical work focused on the timing of European Monetary Union (EMU) accession and on the selection of a pre-accession exchange-rate regime. The tool of our empirical analysis used in both studies is a model simulation that benefits from a consistent macro framework and estimated model equations. Five accession countries were studied. The results demonstrate that it is important to design pre-EMU exchange-rate regimes independently, according to the characteristics of each accession country, such as openness, flexibility, or level of financial wealth. Following the European Exchange-rate Mechanism (ERM II) as a core monetary-policy strategy for the whole of the pre-EMU period may be beneficial only for some accession countries. While Poland would benefit from introducing a fixed-rate regime for the pre-EMU period, for example, the Czech Republic and Slovenia would benefit more from maintaining a floating exchange rate. For Estonia and Hungary, both options have comparable benefits.accession countries; exchange-rate regime; empirical analysis

When to Join the Eurozone: An Empirical Analysis

The paper is the first part of a broader empirical study that considers the entry timing of accession economies into the eurozone and their exchange-rate regimes between the EU entry and prior to the eurozone entry. The presented empirical analysis is based on model simulations and on the outcomes of previous work related to panel estimates of model equations for five accession economies. The first conclusion is that is not possible to search for one-for-all answers as to timing and exchange-rate regimes. Each of the accession countries should decide in accordance with specific country characteristics. According to our analysis, Poland could benefit most from entering the eurozone relatively quickly, while the Czech Republic and Hungary may benefit from a more cautious approach. This diversity reflects different characteristics such as openness, flexibility, and financial wealth. Postponing entry after 2009 would likely carry fewer additional benefits, however.accession; eurozone; empirical analysis; Czech Republic; Hungary; Poland

Early Warning Indicators of Crisis Incidence: Evidence from a Panel of 40 Developed Countries

We provide a critical review of the literature on early warning indicators of economics crises and propose methods to overcome several pitfalls of the previous contributions. We use a quarterly panel of 40 EU and OECD countries for the period 1970–2010. As the response variable, we construct a continuous index of crisis incidence capturing the real costs for the economy. As the potential warning indicators, we evaluate a wide range of variables, selected according to the previous literature and our own considerations. For each potential indicator we determine the optimal lead employing panel vector autoregression, then we select useful indicators employing Bayesian model averaging. We re-estimate the resulting specification by system GMM to account for potential endogeneity of some indicators. Subsequently, to allow for country heterogeneity, we evaluate the random coefficients estimator and illustrate the stability among endogenous clusters. Our results suggest that global variables rank among the most useful early warning indicators. In addition, housing prices emerge consistently as an important domestic source of risk.Early warning indicators, Bayesian model averaging, panel VAR, dynamic panel, macro-prudential policies.

Comparison of Monetary Policy Rules Using a Czech Economy Model

Three alternative policy rules are contrasted in a model framework in this paper. Such simulation and their results provide a background for policy debate on the properties of alternative strategies of Czech monetary policy. The specific features of an economic transition period are reflected in an extended set of measures when comparing the policy rules. The paper presents the results of these simulations, including tests of sensitivity to calibration, and summarizes the conclusions. First, any policy rules that combine several targets are inferior to inflation and exchange-rate rules since they are less efficient in ensuring nominal convergence, and more costly in terms of output, interest-rate and external-balance volatility. Second, exchange-rate rules are less efficient and less costly in terms of output volatility. Inflation policy rules are more efficient and less costly in terms of interest-rate volatility. This result illustrates that it is very difficult to hit upon a single superior strategy. The final choice depends on preferences. Third, exchange-rate and inflation policy rules produce gradual real appreciation. Under exchange-rate rules, real appreciation is due to the inflation differential. Under inflation rules, it is due to gradual nominal appreciation. This result, it is argued, supports the author?s assertion that it is not possible for a central bank to fix any real variable with its strategy.Czech monetary policy; policy rules; convergence

European Economic Association Congress 2000

The annual meeting of the European Economic Association took place in Bolzano, Italy this year. There were more than 120 seminars, many panel discussions, and three main lectures presented. The seminars covered a broad range of issues related to economic theory and to applied research. Particular attention was paid to the features of the ""new economy"" and its implications for European economic developments. The main lectures emphasised the importance of the dialogue centred on the imperfect rationality of economic agents and on the contradictions between the theory of utility function and the outcomes of economic experiments. Czech economists participated in several seminars on economic growth, capital flows, monetary policy and efficiency and equality. The problems facing transitional economies were mainly discussed by experts from developed economies, from Israel and from Russia.EEA; imperfectly rational agents; theory and experiments; monetary policy and models