Work detail

Comparison of Monetary Policy Rules Using a Czech Economy Model

Author: RNDr. Kateřina Šmídková, PhD.
Year: 1998 - winter
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Work type: Dissertations
Language: Czech
Pages: 129
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Abstract: Since koruna turbulence in 1997, many statements have been made about suitable strategies for the Czech monetary policy. This work tries to give a model background for such policy debate. Analogously to preceding research on policy rules, the Czech economy is represented with a small model. Three alternative monetary strategies are approximated by policy rules. Several specific features of the Czech economy (such as large openness, corrections of administered prices and nominal convergence) are reflected in the model. Specifically, during model simulations, major shocks come from external prices and price corrections. Similarly, policy rules mirror strategies of monetary policy that are relevant for the Czech experience. For example, standard inflation targeting rule is modified with a concept of imported equilibrium interest rate. Alternative definitions of aggressiveness of the exchange rate rule correspond to changes in width of the band. Model simulations can be used for comparison of efficiency of rules in ensuring convergence to low inflation and their costs in terms of output, interest rate and trade balance volatility. Three alternative policy rules are compared in a model framework. Results of simulations can provide a background for policy debate on properties of alternative strategies of the Czech monetary policy. Specific features of a period of transition have been reflected in the extended set of measures when comparing the rules. The work presents results of simulations including tests of sensitivity to calibration, and summarises conclusions. First, rules that combine several targets are inferior to inflation and exchange-rate rules since they are less efficient in ensuring nominal convergence and more costly in terms of output, interest rate and external balance volatility. Second, exchange-rate rules are less efficient and less costly in terms of output volatility. Inflation rules are more efficient and less costly in terms of interest rate volatility. This result illustrate that it is very difficult to find a single superior strategy. The final choice depends on preferences. Third, exchange-rate as well as inflation rules produce gradual real appreciation. Under exchange-rate rules, real appreciation is due to inflation differential. Under inflation rules, it is due to gradual nominal appreciation. This result corresponds to our intuition that it is not possible for a central bank to fix any real variable with its strategy.

Downloadable: Dissertation Thesis - Šmídková
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