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Volume 50, Issue 4

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Alternative Monetary Policy Rules in the Model of the Czech Economy

Šmídková, Kateřina

Year: 2000   Volume: 50   Issue: 4   Pages: 224-243

Abstract: Since koruna turbulence in 1997, there has been considerable dialogue concerning suitable strategy for the Czech monetary policy. This paper provides a model framework for such discussion. Three alternative monetary strategies are approximated by different policy rules. Several specific features of the Czech economy (such as its significant openness, administered price deregulation, and nominal convergence) are incorporated in the author?s model. Major shocks come from external prices and price corrections. Similarly, policy rules mirror strategies of monetary policy that are relevant to the Czech experience. For example, the standard inflation-targeting rule is modified by an imported equilibrium interest rate. Alternative definitions of aggressiveness regarding the exchange-rate rule correspond to changes in the width of the band. Model simulations can be used for a comparison of the efficiency of monetary rules in ensuring convergence to low inflation and their costs in terms of output, interest rates, and trade balance volatility.

JEL classification: E52

Keywords: Czech monetary policy; policy rules; convergence

RePEc: n/a

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