Jan Filáček, Ivan Sutóris
This note deals with the issue of inflation targeting flexibility from the perspective of the Czech National Bank and other relevant central banks. We discuss possible ways of increasing the flexibility of the CNB’s monetary policy, namely narrowing the targeted and communicated measure of inflation, prolonging the policy horizon, lowering the aggressivity of the rule to deviations of expected inflation from the target, increasing the smoothing of interest rates and responding to real economic developments. Our simulations show that these adjustments in the CNB’s reaction function would slightly improve the stability of real output, while at the same time leading to large costs in terms of less stable and less anchored inflation.
JEL Codes: C32, E37, E47
Keywords: Inflation targeting flexibility, monetary policy rules, optimal reaction function
Issued: November 2019
Download: RPN No. 2/2019 (pdf, 1.2 MB)