Prague Economic Papers 2014, 23(3):269-289 | DOI: 10.18267/j.pep.484

The Reaction Function of Three Central Banks of Visegrad Group

Josef Arlt, Martin Mandel
University of Economics, Prague, nám. W. Churchilla 4, 130 67 Prague 3, Czech Republic (arlt@vse.cz; mandel@vse.cz).

The aim of our paper is to formulate and empirically verify the simple backward looking econometric model of the monetary policy rule, which would be able to describe the development of monetary policy rate, namely only on the basis of statistically measured and at the given time available information. We focus on the Czech National Bank, the National Bank of Poland and the Magyar Nemzeti Bank in the period of January 1999 to April 2012. In the present paper we discuss some methodological problems associated with the ex-post empirical verification of the central bank's monetary policy rule. We construct an empirical model of the monetary policy rule, justify the choice and the inclusion of explanatory variables, analyse the statistical properties of time series, and verify the alternative forms of econometric models. Our analysis showed that the development of monetary policy rate in the reporting period can be explained by the past and present development of four explanatory variables: yearly inflation rate, exchange rate, ECB main refinancing rate and growth rate of M2. The annualized inflation rate proved to be statistically insignificant in the model. We find interesting that the statistical quality of the estimated model was further increased after a six-month lag of the annual inflation rate added to the model.

Keywords: Visegrad Group, repo rate, monetary policy rules, econometric model, cointegration, annual inflation rate
JEL classification: C12, C22, E43, E47, E52

Published: January 1, 2014  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Arlt, J., & Mandel, M. (2014). The Reaction Function of Three Central Banks of Visegrad Group. Prague Economic Papers23(3), 269-289. doi: 10.18267/j.pep.484
Download citation

References

  1. Andrews, D. W. K. (1991), "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation." Econometrica, Vol. 59, No. 3, pp. 817-858. Go to original source...
  2. Andrews, D. W. K, Monahan, J. CH. (1992), "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator." Econometrica, Vol. 60, No. 4, pp. 953-966. Go to original source...
  3. Arlt, J., Arltová, M. (2009), Ekonomické časové řady. Praha: Professional Publishing.
  4. Arlt, J., Bašta, M. (2008), "Time Series of Monthly and Yearly Inflation Rates and Their Properties". (in Czech) Politická ekonomie, Vol. 56, No. 4, pp. 536-556.
  5. Arlt, J., Bašta, M. (2010), "The Problem of the Yearly Inflation Rate and Its Implications for the Monetary Policy of the Czech National Bank." Prague Economic Papers, Vol. 19, No. 2, pp. 99-117. Go to original source...
  6. Arlt, J., Mandel, M. (2012), "Is It Possible to Predict the CNB Repo Rate on the Basis of the BackwardLooking Monetary Rule?" (in Czech) Politická ekonomie, Vol. 60, No. 4, pp. 484-504.
  7. Beneš, J., Hlédik, T., Kumhof, M., Vávra, D. (2005), "An Economy in Transition and DSGE: What the Czech National Bank's New Projection Model Needs." CNB Working Paper, 2005, No. 12.
  8. Budnik, K., Kolasa, M., Hulej, M., Greszta, M., Murawski, K., Rot. M., Tarnicka, M., Rybaczyk, B. (2008). NECMOD. National Bank of Poland, June 2008.
  9. Brada, J., Brůna, K. (2004), "An Analysis of PRIBOR Interest Rates Sensitivity to Changes in Czech National Bank Repo Rate." (in Czech) Politická ekonomie, Vol. 52, No. 5, pp. 601-621.
  10. Chinn, M. D., Meredith, G. (2004), "Monetary Policy and Long-Horizon Uncovered Interest Parity." IMF Staff Papers, Vol. 51, No. 3, 2004.
  11. Den Haan, W. J., Levin, A. (1997), "A Practitioner's Guide to Robust Covariance Matrix Estimation." In Maddala, G. S., Rao, C. R. (eds.), Handbook of Statistics Vol. 15, Robust Inference, pp. 291-341. Amsterdam: North-Holland. Go to original source...
  12. Dědek, O. (2004), "Four Reflections on Practising Inflation Targeting in the Czech Republic." Politická ekonomie, Vol. 52, No. 2, pp. 147-170. Go to original source...
  13. Durčáková, J., Mandel, M., Tomšík, V. (2005), "Puzzle in the Theory of Uncovered Interest Rate Parity-Empirical Verification for Transitive Countries." Finance India, 2005, Vol. 19, No. 2, pp. 449-464.
  14. Frommel, M., Schobert, V. (2006), "Monetary Policy Rules in Central and Eastern Europe." Deutsche Bundesbank Discussion Paper, 2006, No. 341.
  15. Hlédik, T. (2004), "Quantifying the Second-Round Effects of Supply-Side Shocks on Inflation." Prague Economic Papers, Vol. 13, No. 2, pp. 125-141. Go to original source...
  16. Horváth, A., Kober, C., Szilagyi, K. (2011), "The Magyar Nemzeti Bank´s Monetary Policy Model." MNB Bulletin, June 2011.
  17. Horváth, R. (2008), "Asymmetric Monetary Policy in the Czech Republic?" Czech Journal of Economics and Finance, Vol. 58, No. 9-10, pp. 470-481.
  18. Hu, L., Phillips, P. C. B. (2004), "Dynamics of the Federal Funds Target Rate: a Nonstationary Discrete Choice Approach." Journal of Applied Econometrics, October 2004, Vol. 19, No. 7, pp. 851-867. Go to original source...
  19. Jespersen, J. (2011). Macroeconomic Methodology: A Post-Keynesian Perspective. Cheltenham: Edward Elgar Publishing, Ltd., 2011.
  20. Kukal, J., Van Quang, T. (2011), "Modeling the CNB's Monetary Policy Interest Rate by Artificial Neural Networks." (in Czech). Politická ekonomie, Vol. 59, No. 6, pp. 810-829.
  21. Mandel, M., Kosmata, V. (2000), "The Czech Embarrassment of Inflation Targeting in Transition." Prague Economic Papers, Vol. 9, No. 3, pp. 230-241. Go to original source...
  22. Maria-Dolores, R. (2005), "Monetary Policy Rules in Accession Countries to EU: Is the Taylor Rule a Pattern?" Economics Bulletin, Vol. 5, No. 5, pp. 1-16.
  23. Mehra, Y. P. (1999), "A Forward-Looking Monetary Policy Reaction Function. FRB of Richmond Economic Quarterly, Vol. 85, No. 2, pp. 33-53.
  24. Mohanty, M. S., Klau, M. (2004), "Monetary Policy Rules in Emerging Market Economies: Issues and Evidence." BIS Working Paper, 2004, No. 149. Go to original source...
  25. Newey, W. K., West, K. D. (1987), "A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix." Econometrica, Vol. 55, No. 3, pp. 703-708. Go to original source...
  26. Paez-Farrell, J. (2007), "Understanding Monetary Policy in Central European Countries Using TaylorType Rules: The Case of the Visegrad Four." Economics Bulletin, Vol. 5, No. 3, pp. 1-11.
  27. Senbet, D. (2010), "Estimating Monetary Policy Reaction Function: A Factor-Augmented Sector Autoregressive (FAVAR) Approach." Journal of Money, Investment and Banking, 2010, Vol. 19, pp. 85-113.
  28. Svensson, L. E. O. (1998), "Open-Economy Inflation Targeting." NBER Working Paper Series 6545, May 1998. Go to original source...
  29. Svensson, L. E. O. (1999), "Inflation Targeting as a Monetary Policy Rule." Journal of Monetary Economics, Vol. 43, No. 3, pp. 607-654. Go to original source...
  30. Škop, J. (2012). Central Bank Reaction Functions in CEE. Societe Generale, Cross Asset Research, March 2011, pp. 10-14.
  31. Taylor, J. B. (1993), "Discretion versus Policy Rules in Practice." Carnegie-Rochester Conference Series in Public Policy, Vol. 39, December 1993, pp. 195-214. Go to original source...
  32. Taylor, J. B. (2001), "The Role of the Exchange Rate in Monetary-Policy Rules." American Economic Review, Papers and Proceedings, Vol. 91, No. 2, pp. 263-267. Go to original source...
  33. Vašíček, B. (2011), "Is Monetary Policy in the New EU Member States Asymmetric?" CNB Working Paper, 2011, No. 5.
  34. Verbeek, M. (2004), A Guide to Modern Econometrics. Chichester, UK: John Wiley and Sons, Ltd., 2004.

This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.