Dynamics of Czech Inflation: The Role of the Trend and the Cycle

Michal Franta, Ivan Sutóris

We decompose the Czech inflation time series into the trend and short-lived deviations from the trend by means of an unobserved component stochastic volatility model. We then carry out a regression analysis to interpret the two inflation components. The results indicate a fall in the inflation trend since the start of the sample (1998) which coincides with the introduction of the inflation targeting regime and with subsequent changes to the inflation target pursued by the Czech National Bank. Moreover, the regression analysis suggests that inflation expectations play a dominant role in the evolution of the trend. The behavior of the deviations from the trend exhibits features of an open-economy Phillips curve.

JEL codes: E5, E31

Keywords: Czech inflation, inflation trend, Phillips curve, UCSV

Issued: July 2020

Download: CNB WP No. 1/2020 (pdf, 575 kB)