The purpose of the CNB's economic research is to provide outputs that are relevant to the central bank and of a high standard on the international scale. Relevant outputs are those which help the CNB to expand the know-how needed for its core activities: monetary policy, financial sector supervision and maintaining financial stability. High-standard outputs are those which are ready to apply in practice at the CNB and which are subsequently published in international or regional research journals. The CNB aims to produce its economic research efficiently, hence the medium-term priorities that have been identified for 2007-2012 reflect the challenges that lie ahead. These priorities will guide the research projects in the CNB's Research Programmes for 2007-2008, 2009-2010 and 2011-2012 into the areas where expansion of know-how is most needed.

• Three main challenges in  2007 - 2012
• The CNB's Five Research Priority Areas in 2007-2012
• Research Areas:
  • A. Monetary policy
  • B. Macromodelling and forecasting
  • C. Financial stability
  • D. Fiscal policy
  • E. Real sector and konvergence
• CNB Economic Research 2007-2012 (download the document in pdf format, 32 kB)

The Three Main Challenges in 2007-2012

To increase the emphasis on research in the European context

Since the Czech Republic joined the European Union (EU) in 2004, its economic and institutional links with the EU have deepened. Consequently, the importance of understanding the European and regional context of the CNB's core activities has increased. The CNB is actively involved in Europe-wide policy debates as a member of the European System of Central Banks (ESCB). All its natural research advantages, such as analysis and forecasting of the Czech economy, and its considerable experience in designing and conducting an independent monetary policy strategy are valuable inputs into the ESCB's debates.

To give research support to changes in the CNB's core activities

The coming period will see some profound changes in the CNB's core activities. The CNB is to become the supervisor of the entire financial sector in 2006 and will focus on both the banking and non-banking segments of that sector. Inflation targeting will continue to be pursued in the Czech Republic over the coming years. At some point, this framework will be combined with the ERM II. Adoption of the euro is currently expected around 2010. Afterwards, the CNB will be involved in setting monetary policy for the whole euro area and will provide country inputs into the euro area decision-making process.

To identify and utilise shifts in the economic research frontier

Economic science is evolving fast in several areas relevant to central banks. These shifts in the economic research frontier should be well understood by the CNB so that it can utilise the most useful ones for its core activities. Not all the areas of research conducted by the CNB are the same distance from the frontier. Different strategies have been adopted intentionally, as pushing the frontier forward is more demanding than tailoring an already developed methodology to the Czech environment. Specifically, in macro-modelling the CNB is helping to push the frontier forward, while in the area of financial stability the catching-up process goes on.

The CNB's Five Research Priority Areas in 2007-2012

A. Monetary policy

Strategic and policy issues related to inflation targeting, and independent monetary policy in more general, should be researched in both the Czech and European context in order to provide a background for the CNB's monetary policy prior to euro adoption and for the CNB's participation in the Europe-wide general discussion on monetary policy throughout 2007-2012. The experience of countries that will be adopting the euro before the Czech Republic and the experience of the enlarged euro area should be among the closely followed issues.

B. Macro-modelling and forecasting

In order to improve the quality and robustness of the CNB's modelling suite, the new SDGE models should be finalised and models more driven by data should be developed. The CNB's forecasting models should be gradually improved by applying new advances in economic theory, computational methods and econometrics. The CNB will use these models for generating forecasts and policy simulations under inflation targeting and for producing country inputs into the ESCB's debates after euro adoption.

C. Financial stability

Research on financial stability is gradually gaining prominence. The weight of the financial sector in the economy is increasing, and with it so are international financial linkages. The CNB will become the new financial system supervisor in 2006. The research should reflect that fact. The aim is to gradually converge to the research frontier in this area and invite research topics related to the non-banking sectors of the financial system.

D. Fiscal policy

Fiscal issues such as long-term sustainability and the flexibility of the fiscal system should be researched in order to form the CNB's views on the impact of the fiscal system on economic developments. Fiscal policy is a high-impact macroeconomic instrument and will be the only one remaining at the national level after euro adoption. The available European experience to date indicates that fiscal policy can be one of the most limiting factors in the convergence process and that a further debate on modifications to the SGP, such as changes in fiscal federalism, can be expected.

E. The real sector and convergence

Research on real sector and convergence issues should increase the robustness of monetary policy decisions both under inflation targeting and after euro adoption, doing so by delivering supply-side oriented, disaggregated analyses that improve our understanding of the economy's long-term behaviour and determining factors. Specifically, more detailed knowledge of real economic developments, typically based on micro-data, should help in improving the CNB's macroeconomic predictions, especially at the 'short end", and in setting the initial conditions of the model-based forecasts.

Priority Research Topics for 2007-2012 by Area

A. Monetary Policy

Independent monetary policy - improving the decision-making process

The monetary policy decision-making process is being improved gradually over time. The research should contribute by discussing issues such as optimal monetary policy rules, ex-post forecasts and policy evaluation, the implications of asymmetric shocks for monetary policy, and methods for dealing with uncertainty. Furthermore, the information content of variables which are not typically included in the forecasting framework, such as monetary aggregates, and their potential inclusion in the decision-making process should be researched.

Independent monetary policy - strategic interactions

When conducting independent monetary policy, the central bank interacts with economic agents and financial markets. The research should shed light on these strategic interactions by investigating the right balance between smoothing monetary policy rates and reacting fast to news, how monetary policy should deal with market expectations that differ from the central bank's view, and how to operate in the ERM II framework.

Euro adoption in the region

The euro area will be enlarged in the forthcoming period. The Czech Republic will be able to benefit from observing the frontrunners in the euro adoption process in the region, such as Slovakia. The course of the enlargement and the implications of this important event for both the euro area and the frontrunners should be researched.

Long-term trends, equilibrium values and monetary policy

The quality of monetary policy decisions in a converging economy depends significantly on quantitative knowledge of the long-term economic trends and equilibrium values of important economic variables, since this knowledge predetermines the quality of the forecasts. The research should deepen our understanding of growth and productivity trends and explain the determination of real interest rates, yields and real exchange rates.

The transmission of monetary policy to inflation and output

The research should focus quantitatively assessing the strength and speed of the transmission mechanisms, especially in comparison with well-chosen benchmarks within the EMU. Investigation of the exchange rate and inflation expectations channels are of particular interest. Important questions regarding the direct exchange rate channel that are still not fully resolved include the role of price rigidities and imperfect competition. Inflation expectations, an important component of the real monetary conditions, are still not well understood. The open questions concern their determinants, rationality and measurement.

Inflation dynamics

The distribution of price changes, the degree and causes of price stickiness, inflation persistence, the relationship between perceived and actually measured inflation, and alternative inflation measures should be researched. An understanding of price setting and inflation measurement issues can improve the forecasting models and the design of some components of monetary policy strategy, such as the inflation target.

B. Macro-Modelling and Forecasting

Improvement of current forecasting models

The QPM, currently the core CNB forecasting model, and the suite of SDGE models that are being developed by the CNB for both the Czech economy and the euro area are important forecasting tools and an asset that should be capitalised on. The research should focus on improving these models by enriching them with an ad hoc additional structure in order to improve data coherence, and on evaluating model-solution, simulation and estimation techniques (Bayesian, GMM). The ad hoc dynamics should capture what is missing in the core theory and may thus even prompt modifications to the theory to make the dynamic responses of the model closer to those observed in the data.

Development of alternative forecasting models more driven by data

Various data-driven models (linear, nonlinear, univariate, multivariate, multi-equation) should complement the theoretical QPM and SDGE models. The SDGE models, derived from first principles, are primarily a medium- and long-term forecasting tool, and there is often a trade-off between theoretical consistency and data coherence, especially in the short term. Systemising the short-term forecast is therefore desirable. The research should also make use of the increasing time series span, which now allows for greater application of the estimated models in comparison to the transformation period.

Robustness checks

As the suite of forecasting models developed by the CNB expands, learning to deal with multiple models or multiple versions of models is becoming a priority. The research should focus on how to use more than one model (robustness checks), how to diversify the CNB's portfolio of models, and what weight should be given in the decision-making to data-driven models that are close to the data but might be difficult to interpret.

Inputs to the ESCB's modelling and forecasting work

The research should also focus on a conceptual framework capable of addressing policy-relevant questions from the viewpoint of a member of the euro area, where the interplay between country forecasts and aggregate euro area forecasts is an issue (e.g. pooling national forecasts versus forecasting aggregates in the euro area). Forecasting of national economic developments will be an important part of the ESCB forecasting exercise, so the research should help to update the forecasting models in order to reflect the forthcoming euro adoption.

C. Financial Stability

Modelling the behaviour of international banks

The internationalisation of the financial sector in the context of the single European financial services market, taking the form of international mergers and acquisitions, has increased the foreign presence of financial institutions on domestic markets across Europe. Cross-border banking will affect market structure and competition in the financial sector and could significantly strengthen the contagion of foreign shocks into the Czech financial system. These trends and their links to the efficiency of financial institutions should be investigated.

Analysing convergence trends and their implications for financial stability

The further growth of the financial sector and financial deepening during the period ahead will be accompanied by structural changes leading potentially to banking disintermediation and an increasing significance of households as debtors in the Czech economy. The potential trade-off between this financial sector development and financial stability and the experience of other converging countries should be researched, utilising the microeconomic data on debtors to a greater extent.

Analysing the segments of the financial sector

In addition to its role of banking supervisor, the CNB is to integrate supervision of the other financial institutions and financial markets under its wings starting from 2006. Moreover, the development of the financial system and disintermediation will result in an increasing share of non-banking financial institutions. Therefore, the analysis of these institutions, such as capital market and insurance companies, and their links to banks is set to gain prominence in the years ahead.

Measurement of financial system risks

Measurement of these risks plays a prominent role within the New Basle Capital Accord. The research should focus on the link between financial system risks and macro-variable developments and on analysis of the interrelations between the various types of risk, the spreading of risk among financial institutions and economic sectors, and the efficiency of regulation of those risks. VaR models should be developed for empirical analysis of market risks in the banking sector. Credit risk models should be utilised in further developing the stress testing methodology. The follow-ups to the existing CNB research should include the use of the forecasting models developed for inflation targeting and the use of sectoral data (mainly from the household and corporate sectors). Contagion in the banking sector should be studied using interbank exposure (e.g. payment system) data.

D. Fiscal Policy

The impact of fiscal policy on the economy

There is a need to improve our understanding of the influence of fiscal policy on the Czech economy and its potential to counteract economic shocks. Several alternative modelling methods should be developed in order to provide a robust estimate of the fiscal impulse. The research should also address the fact that the impact of fiscal policy on the economy may change under the ERM II and, later on, with the euro. The relevant experience of small open European economies that have already introduced the euro (e.g. Portugal, Ireland and Greece) should be analysed in this respect.

Micro-foundations of the fiscal system

The microeconomic incentives built into the tax and expenditure systems affect not only the efficiency of short-term fiscal adjustment mechanisms, but also the long-term structural properties of the economy. Special attention should be paid to microeconomic aspects of the pension system (e.g. labour market (dis)incentives embodied in pension systems), given its large weight in the overall welfare system. Besides a comprehensive analysis of the Czech system, a cross-country analysis in the European context should deliver useful insights into the issue of fiscal micro-foundations.

Two key components of fiscal policy

In the preparatory period for euro adoption, research should continue into long-term fiscal sustainability, including the ageing issue and its implications for the real sector, and into the impact of the business cycle on the budgetary balance. In order not to threaten the monetary integration process, fiscal policy must achieve sustainable positions in the long term and the fiscal system needs to stay flexible enough, as it will be the only macroeconomic instrument remaining at the national level after euro adoption.

The EU fiscal framework

As the interpretation of the EU fiscal rules has departed from the initial standpoints, the evolution of the EU fiscal framework, which imposes constraints on the Czech fiscal strategy, should be researched. Issues that could influence the EU fiscal framework in the future, such as the economic scope for tax competition, the calls for coordination of national fiscal policies on the expenditure side and the sustainability of the non-federal system, should be focused on. Also, the impact of the changes in the SGP framework on ECB monetary policy and the harmonisation of national fiscal policies should kept in mind.

E. The Real Sector and Convergence

Addressing new challenges linked to EU accession, ERM II entry and euro adoption

The forthcoming gradual abandoning of independent exchange rate and monetary policies raises the question of which channels will accommodate the potential internal and external shocks. Product and labour market flexibility will gain in significance in a situation where the functioning of other equilibrating channels will be increasingly constrained. Therefore, the research should identify the barriers to more efficient functioning of the product and factor markets, as well as their macroeconomic consequences. In-depth domestically focused research as well as comparative work that also considers the region's experience with euro adoption should be produced in the following directions.

Real convergence and international comparative research

An analysis of cross-country productivity differentials and their impact on inflation/real exchange rate appreciation should be conducted. Furthermore, comparisons of the main domestic rigidities and persistencies with those in the EU and other regions are envisaged, especially labour market issues (the persistence of unemployment, wage rigidity), the propagation of shocks (oil or EUR/USD), and international/disaggregated views of issues such as exchange rate pass-through and inflation persistence.

Economic growth and supply-side performance

Domestic economic growth and supply-side performance should be covered in detail, including sectoral breakdowns, total factor productivity developments and wage/productivity relations. Also, structural changes (industry versus services), market structures and regulation on various markets (e.g. retail chains, manufacturing) and measurement issues (quality bias in the CPI; GDP measurement) should be researched.