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Inflation Targeting Flexibility: The CNB's Reaction Function under Scrutiny

Jan Filáček and Ivan Sutoris

Research and Policy Notes from Czech National Bank

Abstract: 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.

Keywords: Inflation targeting flexibility; monetary policy rules; optimal reaction function (search for similar items in EconPapers)
JEL-codes: C32 E37 E47 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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