Czech National Bank Research Articles

Use of Statistics in the Monetary Policy of the Czech National Bank: The Case of a Country in Transition

Summary In the presented text the authors judge the importance of statistics in the monetary policy of the Czech National Bank (CNB) over the course of the economic transformation process, with particular consideration of changing statistical needs and the possibilities and limits of statistical data exploitation in the monetary analyses. The importance of statistics lies on the level of collection and processing of statistical information and on the level of use of statistical methods to analyse data. Since the start of the 1990s the requirements for statistics were significantly influenced by monetary policy. In the period 1990-1997, monetary targeting was the primary influential factor. Since 1998, the monetary policy is influenced by inflation targeting. Statistical priorities switched from monetary data to economy and financial market data. Much progress has been made in the use of statistical methods for analysing data. Statistics available at present cover the CNB's standard monetary-policy requirements and are on par with those in developed countries. Its further development will reflect the standard changes taking place in the more advanced countries.

Disinflationary Monetary Strategy and Instability of the Forward Yield Curve: The Case of the Czech Republic, 1999–2005

In this study I describe the relationship between monetary policy and medium and long-term swap rates. I focus especially on explanation of the instability of the level and relations of swap and forward rates on the Czech swap market in the context of the Czech National Bank's (CNB) disinflation policy based on direct inflation targeting. Theoretically the main source of this problem is the inconsistency between the central bank's current and expected policy and the anticipated course of economic fundamentals. A common feature is that during disinflation the level of monetary policy restriction is not stable over time and is hard to predict for investors. Besides objective factors such as fluctuating economic growth or limited scope of information, this is also a result of the instability of sensitivity parameters of the central bank's reaction function and of the character of the monetary strategy pursued. Empirical analysis showed a limited effect of changes in the CNB repo rate on the instantaneous adaptation of swap and forward rates. In addition, problems connected with the CNB's weakened credibility were immediately identified, along with related erroneous expectations of investors. I interpret the instability of relations as evidence of differences in investors' inflation predictions of a gradual tendency for the economy to reach a state of low inflation.

Monetary Theory in Czech Economic Thought of the 1990s

The article deals with the evolution of Czech monetary theory during the nineties of the last century. At that time the Czech monetary economists were interested in two following problems: the practical realisation of monetary policy and exchange rate regime. The first mentioned problem is analysed in more details in this article. However the main leaders of the Czech transformation process knew the Austrian School’s theories very well, especially F. A. Hayek´s Law, Legislation and Liberty, the monetary policy of the Czech National Bank has been based on the ideas of monetarism.

Is Foreign Exchange Intervention Effective? Some Micro-Analytical Evidence from the Czech Republic

We estimate a two-equation system on the euro-Czech koruna exchange rate and order flow at hourly frequency within the framework of Evans-Lyons (2001, JME). We use transactions data from the Reuters Spot Matching market in the second half of 2002, during which the Czech National Bank conducted discreet interventions to stem the appreciation of the domestic currency. We find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per 10 million Euro, of which 80 percent persists through the day. The news of intervention increases the price impact of order flow by 3.9 basis points per 10 million Euro, consistently with the notion of intervention efficacy. The order flow equation yields inconclusive results. Our findings on the intraday behavior of the exchange rate provide useful insights on the conditions for effective central bank actions in the future, in view of participation in the ERM II.

Estimation of the Czech Republic Sacrifice Ratio for the Transition Period

Estimation of the costs of disinflation policy is usually done using the sacrifice ratio (SR) coefficient. This paper provides two alternative estimates of SR for the Czech economy. The estimates are based on relatively simple, but transparent and verified models, i.e. their vector autoregression and vector moving average representations. When we analysze our estimates of the Czech SR from the accuracy point of view, we see that the results are very sensitive to the way of definition of monetary shocks. Even though the individual estimates of the SR are generally not accurate enough for monetary policy decision making, there is a good probability that the Czech SR was negative during the transition period analysed, with relatively low absolute value. We may therefore assume that if the Czech National Bank decides to incur monetary restriction, such action would not have long-term significant negative impact on output.

Analýza citlivosti referenčních úrokových sazeb PRIBOR na změny repo sazby České národní banky

Since 1980's many central banks have been changing their monetary strategy to explicit inflation targeting. This new monetary concept is based on management of short-term interest rates in the context of relation between inflation prediction and central bank inflation target. Therefore we try to analyze the crucial problems of efficiency of the inflation targeting strategy - the causality and sensitivity between interest rates on Prague interbank market (PRIBOR) and Czech National Bank repo rate. For this purpose we use the framework of expectation theory with the term premium and simple deterministic regression models. We found out that as repo rate was sticky it led to higher volatility of PRIBOR before repo rate change and when the maturity of PRIBOR was increasing the sensitivity of PRIBOR to repo rate changes was strongly decreasing. In our opinion it's the result of at least partial adjustment of PRIBOR before repo rate changes.

Is Foreign Exchange Intervention Effective? Some Micro-Analytical Evidence from Central Europe

We test the effectiveness of the interventions performed by the Czech National Bank in the EUR/CZK within the framework of the Evans-Lyons (JME, 2002) microstructure model of the forex market. Employing time-stamped quotes and transactions on the Reuters Spot Matching market, we estimate a two-equation system on the rate change and order flow at hourly intervals. We find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per 10 million Euro, of which 80 percent persists through the day. The existence of distinct subperiods enables us to estimate the potential effects of intervention in three different states of the market. First, the central bank might perform secret interventions in orderly market conditions, when dealers perceive a low likelihood of their occurrence. Second, secret interventions might take place in a state characterized by a high likelihood of their occurrence. The third state is characterized by the market's knowledge that intervention is indeed taking place. Our results lend support to the theoretical model and provide useful insight on the conditions for effective central bank intervention in the future.

Čtyři zamyšlení nad cílováním inflace v České republice

The paper consists of four parts each of them devoted to a practical aspect of inflation targeting as conducted by the Czech National Bank. The first part outlines the reasons that led to the adoption of this monetary regime and summarises other advantages for effective and transparent decision-making. The second part addresses the issue of missing inflation targets. It is argued that simple confrontation of targets with actual behaviour of inflation may give a distorted view about the actual performance of monetary policy. The third part discusses a subtle methodological controversy about the difference between so-called escape clauses on the one hand and net inflation on the other. In the last section the author presents his critical view about the role of unconditional forecast in its capacity to indicate future interest rate decisions and to provide a realistic description of transmission mechanism in a small open economy.

Investice českých firem v zahraničí

This study provides information on trends and role of the Czech outward foreign direct investment (OFDI) and evaluates the effects of the OFDI on parent companies. The analysis of trends is based on Czech National Bank data; the effects are evaluated through a unique set of data gathered through a sample survey. The stock of OFDI has grown slowly but steadily between 1993 and 2002. To date, about 80 per cent of OFDI is located in services and about 40 per cent in Central and East European countries (CEECs). The nature of OFDI in the EU is trade facilitating while the nature of OFDI in CEECs is tilted toward manufacturing. Much OFDI aims at avoiding a specific regulation in the home country or takes advantage of financial incentives in host countries. Our results indicate that OFDI is often related to parent company restructuring and is a precondition for maintenance and improvement of competitiveness.

Money demand in the czech republic since transition

We analyse the demand for money since the “break up” of the Czech-Slovak Republics at the beginning of 1993 and for the aggregates M0, Ml, and M2 using monthly data. Due to the widespread use of foreign currency in formally centrally planned economies, we also investigate the issue of currency substitution. Because of our relatively small sample period the Johansen cointegration approach is not used and instead we use the general to specific methodology in a single equation framework. Previous empirical evidence on money demand in Eastern Europe, and specifically Czech Republic, has been mixed. Both graphical and empirical results suggest that any currency substitution was a one-off event due to increased uncertainty at the end of 1992 at the time of the monetary dissolution. Certainly, currency substitution in the Czech Republic is not as strong as has been found in other former centrally planned economies. However, our results do indicate that Czech National Bank may have to take account of foreign interest rates when interpreting movements in the monetary aggregates.

Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic

We present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks' equity positions are often low.

The role of the czech national bank monetary instruments in interest rates targeting during transition

In this paper, the recent development of Czech interest rates during the Czech Republic's transition to a market economy is discussed. First, the situation in the economy and in the banking sector, as well as the monetary policy of the central bank during the period of 1990 - 1999 is presented. However, the main focus is on monetary policy instruments and their application during transition. The paper also describes the targeting of the central bank's policy by using direct limitations in banking during 1990 - 1991 and refinancing instruments exploited during the period of 1991 - 1992. Finally, the central bank's orientation towards free market operations, starting in 1993, is discussed.

Inflation targeting and monetary policy rule of the czech national bank

This paper deals with the inflation targeting regime in the Czech Republic. The study argues that inflation targeting is a monetary policy strategy that can be adopted by the central banks in more advanced transition economies. A dynamic model of inflation targeting in the Czech Republic is discussed in the context of achieving monetary convergence to the European Union. The specified monetary policy rule describes the basic features of the Czech National Bank's behaviour in the period March 1996 to June 2000.

Transition to the Strategy of Inflation Targeting

The Czech National Bank entered 1998 with a new strategy regarding monetary policy based on inflation targeting, thus joining the growing number of central banks whose monetary policy concentrates directly on achieving and maintaining a lower inflation level, that is, without using an explicit intermediate goal. The newly announced strategy has generated interest in the professional as well as the daily press. The timeliness of this subject is reflected in the fact that an entire issue of the journal Finance a uver was devoted to inflation targeting. In this article we focus on five areas that we consider important regarding the transition to inflation targeting. The starting point for the new strategy is explained in the first section of this article. For an ongoing discussion about the orientation of monetary policy, it is obviously important to stress the difference between the benefits of inflation targeting and possible short-run impacts related to the specific short-run inflation target. Inflation targeting stems from a general consensus regard

Is Inflation Targeting the Way to Lower Inflation?

We have decided to devote this issue of the journal Finance a uver to an especially relevant aspect of contemporary monetary policy, so-called inflation targeting.' At the end of 1997, the Czech National Bank announced that it would switch to direct inflation targeting and that it would no longer base its policy on a single intermediary target, which until recently was the exchange rate. Of course, inflation targeting is not a new concept. It has been successfully employed in many countries. The history of this type of monetary policy, however, is rather short, a matter of years. Accordingly, for various reasons, facts attesting to its usefulness are being cast into doubt by opponents. The arguments against inflation targeting are louder with respect to economies in transition. They point to the fact that the transmission mechanisms of transitioning economies are not yet sufficiently well known, so central banks cannot make inflation targeting their goal without jeopardizing their credibility, that is, without un-

An Analysis of Inflation in the Czech Republic Using the P* Model

At the beginning of 1998, the Czech National Bank (CNB) switched from money supply targeting to direct inflation targeting. Implementation of this new monetary policy mechanism depends on the existence of reliable instruments for predicting inflationary pressures. The so-called P* inflation model, a relatively simple representation of the inflation dynamic, is one instrument that was regarded with great optimism in the early 1 990s. This model allows for the prediction of inflation as a shortrun process in which the real price level adjusts to the equilibrium price level determined according to the quantity theory of money. The aim of this article is to define a version of the P* model for the Czech Republic and to apply it to a time series from the period 1991 to 1998. The study's aim is also to show that inflation in the Czech Republic develops in accordance with standard theoretical principles and is primarily a monetary phenomenon. The organization of the remainder of this text is as follows. Part 1 contains a description of how the P* model

Price Convergence and the Readiness of the Czech Economy for Accession to the European Union

The readiness of the Czech economy for accession to the European Union (EU) cannot occur without reducing what has so far been a significant difference in economic performance between the Czech Republic and the EU. In particular, there will have to be a convergence of Czech GDP per capita as measured at purchasing power parity (PPP) and the per capita GDP of the EU countries. This process of real convergence will be accompanied by a simultaneous price convergence-changes in relative prices and a convergence of price levels. At the end of 1998, the economic level of the Czech Republic was slightly more than 60 percent of the EU average, while the relative price level was about 43 percent. Labor productivity was estimated at about 50 percent of the EU average. International comparisons show that the price level of the Czech Republic compared to the EU average is lower than would be expected given the per capita income of our country. This leads some analysts to conclude that the main problem with respect to our future integration into the EU is the difference in price levels. This, however, overshadows the real aspects of convergence. Both sides of the convergence process must be considered simultaneously, and both should be solved through The author works at the Czech National Bank (CNB). The opinions expressed in this article are those of the author and do not reflect the views of the CNB.

European Aspects of the Disinflation Policy of the Czech National Bank

European Aspects of the Disinflation Policy of the Czech National Bank

In search for a new anchor: inflation targeting in the czech republic

In December 1997 the Czech National Bank introduced a new framework for the conduct of monetary policy, inflation targeting. This article examines the preliminary experience with inflation targeting in the Czech Republic. In the second part, we discuss the reasons that have led the Czech National Bank to introduce this monetary policy framework. Third part describes principal operational features of inflation targeting in the Czech Republic, and discusses the specifics of inflation targeting under the conditions of an economy in transition. Fourth part reviews the conduct of monetary policy under the new regime, focusing particularly on how the new policy framework has affected central bank's decisions about interest rates. Fifth part discusses some reasons why implementation of inflation targeting during the first two years was difficult, and sixth part evaluates the experience with inflation targeting and provides some suggestions for improving the framework.

The czech embarrassment of inflation targeting in transition

In 1998 the Czech National Bank (CNB) changed its monetary policy framework and started to target inflation. The article discusses main theoretical aspects of inflation targeting and some practical problems with implementation of inflation targeting. The main characteristics of the inflation and monetary targeting are described in the first and second part. The third part deals with practical issues connected with inflation targeting (number of countries using inflation targeting, quality of inflation predictions, inflation and interest rate volatility). In the final part the CNB monetary policy function is estimated and the results are compared with the theoretical assumptions of the inflation targeting.