Dynamic Inflation Model. The Analysis And The Forecast Of The Macroeconomic Effects Of Desinflation Strategy.

Abstract

The dynamic inflation model is designed explicitly for the needs of the direct inflation targeting which the Czech National Bank (CNB) assumes as a key strategy. The model is elaborated on the basis of previous macroeconomic models MMTS I. and MMTS II. (small model of the Global MacroeconomicAnalysisTeam - version II and I ; for details see Stavrev 1998 and Stavrev 1999), which have been made by the Economic Modelling Division of the CNB. The experience acquiring from using these models pointed out during an identification and a forecasting application that the quality of the model relations quantification can be improved by shorter time intervals among used time series and subsequently by carrying out the adaptive estimation of time varying parameters. The presented model differs from the previous ones in several significant ways : (i) Monthly time series are used, i.e. the new analysis of lagged causal effects and the change of behaviour equations dynamics has had to be performed). (ii) The dynamic model is in a state space form. (iii) Model parameters are time varying and their development is estimated adaptively by the Kalman filter. The dynamic inflation model can be used for the analysis as well as for the forecasting of the macroeconomic results of the inflation targeting strategy.Inflation, time varying adaptive estimation, forecasting, Kalman filter