Can inflation forecast and monetary policy path be really useful? The case of the Czech Republic

Karolina Tura,Magdalena Szyszko

doi:10.12775/equil.2015.022

Abstract

Producing and revealing inflation forecast is believed to be the best way of implementing a forward-looking monetary policy. The article focuses on inflation forecast targeting (IFT) at the Czech National Bank (CNB) in terms of its efficiency in shaping consumers’ inflation expectations. The goal of the study is to verify the accuracy of the inflation forecasts, and their influence on inflation expectations. The research is divided into four stages. At the first stage, central bank credibility is examined. At the second stage – accuracy of the inflation forecasts. The next step of the research covers a qualitative analysis of IFT implementation. Finally, the existence of the interdependences of inflation forecast, optimal policy paths and inflation expectations is analyzed. Credibility of the central bank, accuracy of the forecast and decision-making procedures focused on the forecast are the premises for the existence of relationship between forecasts and expectations. The research covers the period from July 2002 – till the end of 2013. Its methodology includes qualitative analysis of decision-making of the CNB, quantitative methods (Kia and Patron formula, MAE forecasts errors, quantification of expectations, non-parametric statistics). The results confirm the existence of interdependences between inflation forecasts and expectations of moderate strength. The preconditions of such interdependences are partially fulfilled. The research opens the field for cross-country comparisons and for quantification of IFT implementation.

Highlights

IntroductionCentral banks search for the tools that are helpful in shaping inflation expectations and that enhance their forward-looking attitude
The results show that inflation forecasts published by Czech National Bank (CNB) in the chosen period were inaccurate
Anchoring inflation expectations is the main function of inflation forecasts in the central banks implementing inflation targeting strategy

Summary

Introduction

Central banks search for the tools that are helpful in shaping inflation expectations and that enhance their forward-looking attitude. Producing and revealing inflation forecast is such a tool. An ability to guide market expectations can be analyzed in the context of the central bank credibility. The central bank is credible when the private sector believes that the central bank will realize what it said The most obvious central bank’s declaration is inflation target. When the market expectations are on the inflation target level, the central bank is perceived as credible. The article focuses on the central bank inflation forecasts and consumer expectations. They are analyzed jointly, and the context of inflation forecast accuracy and IFT implementation is added

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Methods

Results

Conclusion