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Adverse Effects of Monetary Policy Signalling
Matějů, Jakub ; Filáček, Jan
Assuming information asymmetry between private agents and the central bank about the state of the economy, an unexpected change in interest rates signals the central bank’s perceived state of the economy and facilitates an update of private expectations in an adverse, perhaps unintended way. This “updating channel” might counteract the standard transmission from interest rates to inflation and output. We develop a simple model laying down a theoretical basis for the adverse effects of monetary policy signalling. We also detect the presence of the updating channel in private forecasts of inflation in a cross-country sample of selected OECD countries.
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Risk Aversion, Financial Stress and Their Non-Linear Impact on Exchange Rates
Adam, Tomáš ; Benecká, Soňa ; Matějů, Jakub
This paper shows how the reaction of selected emerging CEE currencies to increased uncertainty depends on market sentiment in a core advanced economy or even on the global scale. On the example of the Czech koruna, a highly stylized model of portfolio allocation between EUR- and CZK-denominated assets suggests the presence of two regimes characterized by different reactions of the exchange rate to increased stress in the euro area. The “diversification" regime is characterized by appreciation of the koruna in reaction to an increase in the expected variance of EUR assets, while in the “flight to safety" regime, the koruna depreciates in response to increased variance. We suggest that the switch between regimes may be related to changes in risk aversion, driven by the actual level of strains in the financial system as captured by financial stress indicators. Using the Bayesian Markov-switching VAR model, the presence of these regimes is identified in the case of the Czech koruna and to a lesser extent in the case of the Polish zloty and the Hungarian forint. We find that a slight increase in euro area financial stress causes the koruna to appreciate, but as financial market tensions intensify (and investors’ risk aversion increases), the Czech currency depreciates in response to a financial stress shock.
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How are inflation targets set?
Horváth, Roman ; Matějů, Jakub
This paper contributes to a better understanding of how inflation targets are set. First, writers gather evidence on how inflation targets are set from official central bank and government publications and from a questionnaire of our own design. Second, writers estimate the determinants of the level of the inflation target in 19 inflation-targeting countries using unbalanced panel interval regressions to deal with the issue that targets are typically set as a range rather than as a point.
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