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Inflation Differentials in the European Union: Panel Data Analysis of the Driving Factors for Inflation Differentials in the New Member States
Koprnická, Kamila ; Horváth, Roman (advisor) ; Šmídková, Kateřina (referee)
In this rigorous thesis, we analyse inflation differentials in the EU. The aim of the study is twofold. First, based mainly on literature review, we describe long-term trends and potential causes of inflation differentials in the euro area as well as in the new EU member states. Second, we examine the driving factors for inflation differentials in a panel of the new European Union member states via-à-vis the euro area in 1997-2006. In particular, we use the methodology of the influential study by Honohan and Lane (2003) exploring the role of nominal effective exchange rate, cyclical conditions, fiscal policies and price convergence in inflation differentials across the euro area countries. The application of the same methodology and explanatory variables enables us direct comparison with results of Honohan and Lane (2003). Our results suggest that the given factors are important determinants of inflation differentials in the new EU member states, too. Exchange rate appreciation and a higher price level in the new EU member states are associated with a narrower inflation differential vis-à-vis the euro area, while a fiscal deficit and a positive output gap seem to contribute to a higher inflation differential. Nevertheless, the effect of price convergence on inflation differentials is found to be...
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Banking and Currency Crises: Differential Diagnostics for Developed Countries
Joy, Mark ; Rusnák, Marek ; Šmídková, Kateřina ; Vašíček, Bořek
We identify a set of “rules of thumb” that characterise economic, financial and structural conditions preceding the onset of banking and currency crises in 36 advanced economies over 1970–2010. We use the Classification and Regression Tree methodology (CART) and its Random Forest (RF) extension, which permits the detection of key variables driving binary crisis outcomes, allows for interactions among key variables and determines critical tipping points. We distinguish between basic country conditions, country structural characteristics and international developments. We find that crises are more varied than they are similar. For banking crises we find that low net interest rate spreads in the banking sector and a shallow or inverted yield curve are their most important forerunners in the short term, whereas in the longer term it is high house price inflation. For currency crises, high domestic short-term rates coupled with overvalued exchange rates are the most powerful short-term predictors. We find that both country structural characteristics and international developments are relevant banking crisis predictors. Currency crises, however, seem to be driven more by country idiosyncratic, short-term developments. We find that some variables, such as the domestic credit gap, provide important unconditional signals, but it is difficult to use them as conditional signals and, more importantly, to find relevant threshold values.
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The Exchange Rate as an Instrument at Zero Interest Rates: The Case of the Czech Republic
Franta, Michal ; Holub, Tomáš ; Král, Petr ; Kubicová, Ivana ; Šmídková, Kateřina ; Vašíček, Bořek
This study examines the use of the exchange rate by the Czech National Bank as a monetary policy instrument at the zero lower bound on interest rates. It provides a review of the economic literature on unconventional monetary policy instruments and particularly on the possibility of using the exchange rate. It explains the CNB’s reasons for further easing monetary policy and for choosing the exchange rate instrument and its specific level, and discusses its expected benefits in the case of the Czech Republic. It also explains why the CNB ultimately decided to transparently declare a one-sided exchange rate commitment with potentially unlimited foreign exchange interventions. The article concludes by assessing the impacts of the exchange rate weakening on the Czech economy to date, as compared to what the CNB had expected, and by describing the public debate of the CNB’s action and related changes in its communication strategy.
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Inflation Reports and Models: How Well Do Central Banks Really Write?
Bulíř, Aleš ; Hurník, Jaromír ; Šmídková, Kateřina
We offer a novel methodology for assessing the quality of inflation reports. In contrast to the existing literature, which mostly evaluates the formal quality of these reports, we evaluate their economic content by comparing inflation factors reported by the central banks with ex-post model-identified factors. Regarding the former, we use verbal analysis and coding of in flation reports to describe inflation factors communicated by central banks in real time. Regarding the latter, we use reduced - form, new Keynesian models and revised data to approximate the true inflation factors. Positive correlations indicate that the r eported inflation factors were similar to the true, model-identified ones and hence mark high-quality inflation reports. Although central bank reports on average identify inflation factors correctly, the degree of forward-looking reporting varies across fa ctors, time, and countries.
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Economic research bulletin (2007, No.1)
Heřmánek, Jaroslav ; Hlaváček, Michal ; Jakubík, Petr ; Geršl, Adam ; Derviz, Alexis ; Podpiera, Jiří ; Šmídková, Kateřina
This issue of the CNB Research Bulletin looks at advances in the area of financial stability. Financial stability issues have attracted the attention of central banks in the last 10 years, mainly due to the rapid development of financial systems, the emergence of new financial products and the increased integration of the financial system across borders. These issues are extremely important for the Czech financial sector as well. One of the most widely used analytical tools for evaluating the stability of the financial sector is stress testing. The first article – by Jaroslav Heřmánek, Petr Jakubík and Michal Hlaváček – describes progress in this area as compared to earlier versions of stress testing. Progress has been made primarily in the areas of modelling credit risk and linking the stress testing to the CNB’s official macroeconomic forecast. The second and third articles – by Adam Geršl and by Alexis Derviz and Jiří Podpiera – are devoted to the issue of cross border-contagion in the Czech Republic. This problem is of great importance for the Czech Republic due to the strong foreign ownership of the Czech banking sector and the increasing crossborder flows of capital. The article by Adam Geršl uses macroeconomic data from BIS and compares the threats of cross-border contagion from other CEECs using a common creditor index. The article by Alexis Derviz and Jiří Podpiera presents the results of a sophisticated microeconomic model of lending contagion within multinational banking groups together with an empirical model of lending contagion using individual bank data from Bankscope.
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Targeting inflation under uncertainty: policy makers's perspective
Šmídková, Kateřina
Reflecting the further progress of the methodological debate inside the CNB, this paper aims to provide suggestions to policy makers as to which methods could be used to assess uncertainty during the monetary policy decision process. Suggestions for each stage of the process are summarised in the final chapter. These take into account the findings of surveys of three very distinct sources – the economic literature on monetary policy under uncertainty, the managerial literature on decision analysis, and the real-life strategies of five central banks.
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Central banks' voting records and future policy
Horváth, Roman ; Šmídková, Kateřina ; Zápal, Jan
Writers assess whether the voting records of central bank boards are informative about future monetary policy. First, they specify a theoretical model of central bank board decisionmaking and simulate the voting outcomes. Three different versions of model are estimated with simulated data: 1) democratic, 2) consensual and 3) opportunistic. Next, the model predictions are tested on real data on six countries (the Czech Republic, Hungary, Poland, Sweden, the United Kingdom and the United States).
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