I.9

When the inflation targeting framework was introduced in the Czech Republic in late 1997, one of the key ambitions was to anchor inflation expectations (Hrnčíř and Šmídková (1998)). In this brief note I assess to what extent this ambition was actually achieved, building on the available empirical research on this issue that has been done at the Czech National Bank (CNB). I also look in more detail on the high-inflation episode of 2008, which provided a stringent test of the expectation’s stability. 1. Fulfilment of inflation targets and stability of inflation expectations During the first 10 years of inflation targeting, ie 1998–2007, there were significant deviations of inflation from the CNB’s targets, typically downwards (Šmídková (2008)). The year 2008 was the first in which inflation exceeded the CNB’s target significantly (see Figure 1). Figure 1 Actual inflation vs CNB’s target