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CNB > Economic research > Research publications > CNB Working paper series > 2012 > Changes in Inflation Dynamics under Inflation Targeting? Evidence from Central European Countries

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

Jaromír Baxa, Miroslav Plašil, Bořek Vašíček

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. In addition, we found some evidence that the ‘structural’ parameters of the NKPC are somewhat related to the macroeconomic environment.

JEL codes: C11, C22, E31, E52

Keywords: Bayesian model averaging, Central European countries, inflation dynamics, New Keynesian Phillips curve, time-varying parameter model

Issued: May 2012

Download: CNB WP No. 4/2012 (pdf, 620 kB)