Changes to the CNB’s core prediction model
During the preparation of this forecast, several major changes were made to the core prediction model, leading to a reduction in the long-term effect of specific price shocks on other price categories and to a faster monetary policy reaction and transmission.
The view of model price formation in individual price categories has been changed. According to past experience, major changes in regulated prices and energy prices have not passed through to other price categories as significantly and for as long as suggested by the original model. Therefore, the excessive impact of such fluctuations in the forecasts has been expertly reduced. The model in its present form systematically eliminates this excessive impact. This attempt to bring the model view closer into line with the observed behaviour of the economy has resulted in a change to the model equations that describe the price formation mechanism and affect the speed of transmission. The result is reduced overall model rigidity and increased forward-lookingness of the model.
The change to the model affects the reaction function of the central bank and all equations influencing price formation. These include the inflation expectations and Philips curve equations. Although the assumption of the effect of inflation expectations of individual components on overall expectations remains unchanged, prices do not pass through immediately across the individual price categories. The forward-lookingness of inflation expectations for individual price categories has been increased slightly; in the case regulated prices, inflation expectations are perfectly forward-looking. At the same time, the speed of the monetary policy reaction has been increased through reduced interest rate persistence in the reaction function.
The effect of the model changes on the forecast can be seen from the difference between the baseline scenario and the alternative scenario – see section III.3 The message of the forecast.