Jan Frait

English

Research Papers in Economics

314 Finance a úvûr – Czech Journal of Economics and Finance, 55, 2005, ã. 7-8
Inflation Targeting, Expectations 
and Uncertainty in Monetary Policy
Finance a úvûr – Czech Journal of Economics and Finance published since
1997, approximately twice a year, an issue focusing on a single topic. One
of the first issues of the sort was the package of papers in No. 4, 1998, en-
gaging in a then new monetary framework of the Czech economy – infla-
tion targeting. At that time, inflation targeting was a new phenomenon and
a hot topic in macroeconomic literature. The Czech National Bank became
pioneers of inflation targeting, at least in countries that are marked as tran-
sitional or emerging-market economies. The goal of the issue from 1998 was
to provide a general introduction to inflation targeting and discuss its ap-
plicability to the Czech Republic and similar economies. Many of the peo-
ple who participated in this issue, such as authors or editors, subsequently
were or currently are influencing fundamentally the course of the Czech mo-
netary policy.
During the next seven years inflation targeting in the Czech Republic
went through a dynamic progression and as such was labelled as fully-
-fledged inflation targeting. In other words, the use of the regime in
the Czech Republic does not differ much from the ones in the United King-
dom, Sweden, New Zealand or Canada. The Czech National Bank, the same
as the central banks in these countries, strives for maximum credibility that
is based on transparency, consistency and predictability of the policy. Given
that, the authors of this single-topic issue do not have to deal with general
questions of policy based on inflation targeting. Instead, they can afford to
focus on detailed and specific features of the inflation targeting framework.
The paper written by K. ·mídková “How Inflation Targeters (Can) Deal
with Uncertainty” comes out of the assumption that central banks target-
ing inflation have a need for a well-designed methodology for dealing with
uncertainty in policy-making. The reasons are the forward-looking nature
of monetary policy and the necessity of being able to explain the implica-
tions of uncertainty to the public. The central banks, up to now, have ne-
glected this area a bit. It is rather easy to find the description of the fore-
casting models of central banks on their web sites. On the contrary, an exact
delineation of the framework for dealing with uncertainty is not so easy to
find. The author thus proposes, as one of the possible solutions, a compa-
rative framework based on the description of the methods available to deal
with uncertainty for each element of the interest rate decision-making pro-
cess. Such a general framework may encompass the disadvantages of the in-
dividual methods that can differ quite substantially.
V. Kotlán and D. Navrátil in the paper “Is the CNB Predictable?” analyze
the predictability of the Czech National Banks’ decisions on the changes in
the monetary policy interest rate setting. They conclude that on average
the interest changes are predictable. That holds especially for interest rates
s_314_315  5.8.2005  15:30  Stránka 314315 Finance a úvûr – Czech Journal of Economics and Finance, 55, 2005, ã. 7-8
with longer maturities that may serve as an indicator of the expected fu-
ture direction of interest rates. Theanalysis also suggests that predictability
increases with time.
M. Fukaã in his contribution “Inflation Expectations in the Czech Inter-
bank Market” looks at the characteristics of surveys of inflation expecta-
tions carried out by the Czech National Bank. One of the conclusions states
that the surveys fail to forecast future inflation, but they have a predictive
power for interest rates and that they do not statistically differ from mar-
ket expectations. Along with these results, the author articulates a number
of questions related to dealing with the expectations of private agents in
macroeconomic models and in the analyses of the optimal monetary policy.
T.  Holinka in the paper “Faktory ovlivÀující dlouhodobé úrokové sazby
v âR” (The Determinants of Long-Term Interest Rates in the Czech Repub-
lic) quantifies the factors behind changes in Czech long-term interest rates
and separates the nominal and real components of the movements. The pa-
per is a reflection of the major decline in the interest rate differential be-
tween the Czech and the Euro area markets in 1999–2002. The conclusion
is that the drop in Czech long-term rates is due to the decline in relative
inflation premium and also due to the moderation of inflation expectations.
At the same time, the fall in the interest rate differential can hardly be at-
tributed to the changes in the Czech real interest rates.
J. Filáãek deals similarly to the paper by M. Fukaã with the role of the ex-
pectations in monetary policy. The paper “Inflaãní oãekávání v mûnové
politice” (Inflation Expectations in Monetary Policy) emphasizes the impact
of interest rate formation on the economy’s behaviour and monetary policy
performance. In a model of inflation targeting in a small open country,
the economy is exposed to bunch of shocks and its reaction is described de-
pending on whether the inflation expectations are formed in a naive, adap-
tive or rational way. From a monetary policy perspective, only expectations
shaped in a rational style have potential to deliver the optimum results.
The materialization of this particular state depends to a large extent on
the way in which monetary policy is conducted, i.e. on its credibility, trans-
parency and predictability.
Jan FRAIT
issue editor
s_314_315  5.8.2005  15:30  Stránka 315

: Inflation Targeting, Expectations and Uncertainty in Monetary Policy (Guest editor’s summary) (in English)

http://journal.fsv.cuni.cz/storage/1023_s_314_315.pdf

: Inflation Targeting, Expectations and Uncertainty in Monetary Policy (Guest editor’s summary) (in English)

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