A brief analysis by David Vavra on monetary policy anchors of the Czech National Bank


March 27, 2023

David Vavra, OGR's Managing Partner has created a short piece of illustration that shows how different anchors of monetary policy worked in recent decades. The chart below compares the CPI in the Czech Republic since 2006 to hypothetical price level trajectories based on point inflation targets of 3% (valid before 2010) and 2% (valid since 2010).

Source: OGR calculation

Prior to 2014, the practice of inflation targeting in the Czech Republic was essentially equivalent to a price level targeting. This remained the case despite the turbulence caused by the Global Financial Crisis and the surge in world oil and food prices during 2007-2008. It is also worth noting that during this period, the inflation target was lowered from 3% to 2%.

The difference between inflation- and price-level-targeting became more apparent during 2014 and 2015, when inflation fell well below the 2% inflation target. It took the Czech National Bank almost two years to restore inflation to its target level. However, crucially, the CNB did not attempt to bring the CPI back to the original trajectory at that time, which is a manifestation of the difference between inflation- and price-level-targeting.

Inflation hovered close to 3% after 2019, which brought the price level closer to the original price level trajectory based on official inflation target numbers by mid-2021. However, both inflation and price level have been unanchored since then.

As David has emphasized several times, policymakers may need to reconsider the effectiveness of their current monetary policy tools in maintaining price stability in the long term.