Convergence Between the EU and Central and Eastern Europe
Edited by David G. Dickinson and Andrew W. Mullineux
ÿ Miroslav Hrnc’r and Katerina Sm’dkov‡* ÿÿ ÿ INTRODUCING INFLATION TARGETING In December 1997, the Czech National Bank (CNB) announced that it would switch to inflation targeting. After eight years of relying on intermediate targets, this represented a historic change in the strategy of monetary policy. It is worth noting that price stability has always been the ultimate target of Czech monetary policy. However, there were different strategies applied to reaching this long-term target. In the framework of inflation targeting, the inflation targets have been explicitly specified in terms of net inflation derived from consumer price index (CPI) inflation for two time horizons: net inflation to be 6 per cent ±0.5 per cent by the end of 1998 and 4.5 per cent ±1 per cent by the end of the year 2000. (See Figure 3.1.) A Short History The stability of the Czech koruna has been the ultimate monetary policy target of the CNB according to bank law since the very beginning of the bankÕs existence.1 In 1993, the Czech Republic had reached the halfway mark in both the transitional process and the process of disinflation. As a consequence, it was necessary to derive the strategy of monetary policy from some concept of medium-term stability. During 1993Ð97, before switching to inflation targeting, the CNB had used three strategies. All three were based on working with intermediate targets and were to a significant extent affected by the transitional process. For example, instruments were being changed quite often as financial markets progressed from...
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