Changes in Inflation Dynamics under Inflation Targeting? Evidence from Central European Countries

0395371 - ÚTIA 2014 CZ eng V - Research Report
Baxa, Jaromír - Plašil, M. - Vašíček, B.
Changes in Inflation Dynamics under Inflation Targeting? Evidence from Central European Countries.
Praha: Czech National Bank, 2012. 40 s. Working paper series, 4/2012. ISSN 1803-7070
Institutional support: RVO:67985556
Keywords : Bayesian model averaging * inflation dynamics * time-varying parameter model
Subject RIV: AH - Economics
http://library.utia.cas.cz/separaty/2013/E/baxa-0395371.pdf

The purpose of this paper is to provide a novel look at the evolution of inflation dynamics in selected Central European (CE) countries. We use the lens of the New Keynesian Phillips Curve (NKPC) nested within a time-varying framework. Exploiting a time-varying regression model with stochastic volatility estimated using Bayesian techniques, we analyze both the closed and open-economy version of the NKPC. The results point to significant differences between the inflation processes in three CE countries. While inflation persistence has almost disappeared in the Czech Republic, it remains rather high in Hungary and Poland. In addition, the volatility of inflation shocks decreased quickly a few years after the adoption of inflation targeting in the Czech Republic and Poland, whereas it remains quite stable in Hungary even after ten years’ experience of inflation targeting. Our results thus suggest that the degree of anchoring of inflation expectations varies across CE coutries.
Permanent Link: http://hdl.handle.net/11104/0223480