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Origin of Current High Inflation in the Czech Economy (2022)
Název práce v češtině: Původ současné vysoké inflace v české ekonomice (2022)
Název v anglickém jazyce: Origin of Current High Inflation in the Czech Economy (2022)
Klíčová slova anglicky: inflation, SVAR model, monetary policy, supply and demand shocks
Akademický rok vypsání: 2021/2022
Typ práce: bakalářská práce
Jazyk práce: angličtina
Ústav: Institut ekonomických studií (23-IES)
Vedoucí / školitel: Mgr. Ing. Tomáš Šestořád
Řešitel: skrytý - zadáno vedoucím/školitelem
Datum přihlášení: 23.08.2022
Datum zadání: 23.08.2022
Datum a čas obhajoby: 12.06.2023 09:00
Místo konání obhajoby: Opletalova, O314, místnost. č. 314
Datum odevzdání elektronické podoby:02.05.2023
Datum proběhlé obhajoby: 12.06.2023
Oponenti: prof. PhDr. Tomáš Havránek, Ph.D.
 
 
 
Seznam odborné literatury
1. Babecká Kucharčuková, O., 2009. Transmission of Exchange Rate Shocks into Domestic Inflation: The Case of the Czech Republic. Czech Journal of Economics and Finance, (2).
2. Brooks, C., 2014. Introductory Econometrics for Finance. 3rd ed. Cambridge University Press.
3. Cnb.cz. 2022. Monetary Policy Report — Spring 2022. [online] Available at: <https://www.cnb.cz/export/sites/cnb/en/monetary-policy/.galleries/monetary_policy_reports/2022/spring_2022/download/mpr_2022_spring.pdf>.
4. Kilian, L. and Lütkepohl, H., 2018. Structural Vector Autoregressive Analysis. Cambridge: Cambridge University Press.
5. Leiva-Leon, D., Martínez-Martín, J. and Ortega, E., 2022. Exchange Rate Shocks and Inflation Co-movement in the Euro Area. International Journal of Central Banking, 18(1).
6. O’Brien, D., Dumoncel, C. and Gonçalves, E., 2021. Economic Bulletin Issue 1, 2021. [online] European Central Bank. Available at: <https://www.ecb.europa.eu/pub/economic-bulletin/html/eb202101.en.html#toc17>.
7. Ruch, F. and Taskin, T., 2022. Demand and Supply Shocks. [online] Prospects Group. Available at: <https://openknowledge.worldbank.org/bitstream/handle/10986/36923/Demand-and-Supply-Shocks-Evidence-from-Corporate-Earning-Calls.pdf>.
8. Stock, J. and Watson, M., 2001. Vector Autoregressions. Journal of Economic Perspectives, 15(4), pp.101-115.
Předběžná náplň práce v anglickém jazyce
Research question and motivation
Annual inflation rate in Czech Republic already noted a slight increase to 3.8% in 2021, as measured by the consumer price index. Reaching two-digit values it has continued to rise in 2022, thus the Czech economy is facing the highest inflation rate since December of 1993. The case of Czech Republic seems interesting also because inflation there is higher than in other countries even though the Czech National Bank (CNB), unlike most economies, responded early and quickly to the situation by raising interest rates. Furthermore, advanced economies have been facing the problem of high inflation after a relatively long time, because in recent years the problem was rather low inflation and the deflation threat. That is the reason why this topic has not been extensively covered yet. O’Brien, Dumoncel and Gonçalves (2021) studied the role of demand and supply factors in HICP inflation during the COVID-19 pandemic using the DSGE model method. Their analysis enables better comprehend the response of inflation to the multi-dimensional COVID-19 shock. Leiva-Leon, Martínez-Martín, and Ortega (2022) showed specifically how prices in euro area countries responded to exchange rate shocks using a structural VAR model. When it comes to Czech Republic, the CNB releases quarterly paper that decomposes inflation according to Czech Statistical Office (CZSO) data and proposes inflation forecast. No recent papers, however, shows an approach to analyze the origin of current inflation in the Czech economy. Aim of this work would be to analyse inflation through a shock decomposition, hence the inflation will be explained through macroeconomic variables shocks such as exchange rate, GDP, foreign prices, etc. I will therefore aim to provide a better understanding of how prices respond to external shocks but also considering domestic economic, monetary, and fiscal conditions. Hence, I intend to find the origin of current inflation according to its factors. Finally, this analysis could for instance bring insight to the effect of interest rate and exchange rate on inflation. I will try to discuss the CNB monetary policy decisions answering questions such as if the CNB should already intervene intensively in September 2021 to appreciate the Czech crown.
Research questions: What fraction of the variation in inflation in the past years can be explained by monetary policy as opposed to external shocks? What is the origin of inflation in the Czech economy in 2022?

Contribution
My work will contribute to the existing literature on the inflation topic in the Czech economy in several ways. First, in my analysis, I will identify the magnitude of supply and demand shocks contributing to the price increase in the period of current high inflation. Second, I will also discuss the effect of monetary policy on the current situation focusing on CNB tools such as interest rate or currency intervention. Such issues have not been covered in literature on the topic yet using the structural VAR model.

Methodology
Aim of this work will be to produce a structural VAR model for the Czech economy that will be able to determine the inflation factors (external factors, fiscal policy, domestic economy conditions, monetary conditions).
Thus, there would be inflation rate and then several other macroeconomic variables in the model. Firstly, I will choose variables which represent domestic demand pressures (such as unemployment, GDP, average wages, unit labour costs, industrial producer price index, output of production industries or retail sales), external inflationary pressures (including changes in the nominal exchange rate, world commodity prices, and indices of world oil prices). I will investigate monetary variables; hence I take the aggregates M0, M1, and M3 and short interest rate as the main monetary factors. Lastly, I intend to include variables considering fiscal policy, such as transfers to households (e.g., transfer payments during COVID-19). In general, I will try to use monthly data from 1996 until December 2022 in order to construct a time series model. Main sources will be CZSO, OECD, ECB, and World Bank.
Based on the structural VAR model, impulsive response functions (IRF) and forecast error variance decomposition (FEVD) would then be estimated. Hence, inflation can be fitted through the shock decomposition, i.e., macroeconomic variables shocks (exchange rate, GDP, foreign prices, etc.).

Outline
1. Introduction and motivation
2. Literature review: I will summarize previous research papers on determinants of inflation in the Czech economy as well as in other countries. Different approaches how identify the origin of inflation will be presented.
3. Data: I will provide a relevant description of data issued from CZSO, OECD, ECB and World Bank.
4. Methods: I will present a structural VAR model.
5. Results: I will present the results of the estimation and will discuss the origin of current inflation in Czech Republic. I intend to estimate impulsive response functions and forecast error variance decomposition. Then, I will formulate implications for practice such as monetary policy efficiency of CNB as well.
6. Conclusion
 
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