Fulfilment of the Maastricht Inflation Criterion by the Czech Republic: Potential Costs and Policy Options

Vit Barta

Research and Policy Notes from Czech National Bank, Research and Statistics Department

Abstract: The purpose of this paper is twofold: firstly, to identify and quantify the potential costs to the Czech economy should fulfilment of the Maastricht inflation criterion (MIC) require disinflation; and secondly, to discuss and suggest policies geared towards minimising the costs related to meeting the MIC. We assume that the real appreciation of the koruna will be about 1.5% during the reference period. Three disinflation simulations are derived from this assumption. The results show that a decline in inflation by 0.5 p.p., 1 p.p. and 1.5 p.p. leads to a cumulative loss of output reaching about 0.5%, 1% and 1.6% respectively of annual potential GDP over a period of four years. The time restriction imposed on the simulations implies that the shorter the time to reach a given lower level of inflation, the higher the initial increase in the interest rate and the more aggressive the policy rule needed. The simulation results and the likely application of the monetary convergence criteria are relevant to the discussion of policy options. We argue that due to the asymmetry of the Maastricht exchange rate criterion (MERC), allowing for nominal appreciation rather than depreciation, fulfilment of the MIC should be superior. Also, we suggest that the main task for the CNB will be to focus on reaching a level of inflation consistent with the presumed level of the MIC sufficiently early before the reference period. This may require a downward adjustment of the CNB’s inflation point target and an extension of the current policy horizon.

Keywords: Disinflation; EMU entry; euro adoption; Maastricht inflation criterion; policy options; real exchange rate appreciation; output loss. (search for similar items in EconPapers)
JEL-codes: E31 E32 E47 E52 E58 E63 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:rpnrpn:2005/04

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