Inflation Targeting and the Role of the Exchange Rate: The Case of the Czech Republic

This article analyzes the recent conduct of monetary and exchange rate policies in the Czech Republic. The Czech Republic entered 1993 as a newly independent country. It has introduced inflation targeting and floating exchange rate regime. The multidimensional nature of the inflationtargeting definition explains why there is no consensus about whether or not it should be employed. However, the Czech Republic experience with inflation targeting seems to have been satisfactory. The authority has succeeded in maintaining a stable and moderate rate of inflation while enjoying economic growth. The exchange rate also has been stable. Using the Taylor rule, this article shows that the monetary authority has managed financial policy adequately and that the central bank looks forward rather than backward when it formulates monetary policy. Moreover, the exchange rate system, regardless of free-floating rhetoric, does not heavily influence the conduct of monetary policy in the Czech Republic because the central bank need not manipulate the exchange rate strongly and knows that exchange rate policy does not have a strong effect on the exchange rate itself under the global economy and financial deregulation.