Optimal Forward-Looking Policy Rules in the Quarterly Projection Model of the Czech National Bank

Jan Strasky

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

Abstract: This paper analyses the performance of the inflation forecast-based (IFB) monetary policy rules in the quarterly projection model of the Czech National Bank. The paper begins by reviewing the model and its parametrization, including the variance-covariance matrix of disturbances employed in simulations. The main part of the paper presents the results of an extensive grid search over various targeting horizons and coefficient values for a simple IFB rule with optimized coefficients, and suggests three possibilities for improvement: a shorter targeting horizon, a higher relative weight placed on inflation gap stabilization, and a lower coefficient on partial interest rate adjustment. These results are supported by an analysis of the impact of individual shocks on the optimal coefficients of the IFB rule. The last section of the paper argues for inclusion of the real exchange rate stabilization objective in the policy maker’s loss function and repeats the grid search for an optimal rule allowing for the real exchange rate feedback term. The previous results are not dramatically altered and we conclude that the stabilization properties of the extended rules are comparable with the those of the original optimized IFB rules.

Keywords: Exchange rates; inflation targeting; monetary policy rules; open economy. (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:cnb:rpnrpn:2005/05

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