Is it Possible to Predict the CNB Repo Rate on the Basis of the Backward-Looking Monetary Rule?

The aim of our paper is to formulate and empirically verify the simple backward looking econometric model of the monetary rule, which would be able to describe the development of CNB repo rate, namely only on the basis of statistically measured and in the given time available information. We focus on the period after 1998, when the CNB´s inflation targeting policy is implemented and the repo rate (14 days) plays the role of the monetary policy rate. In the paper we discuss some methodological problems associated with the "ex post" empirical verification of the central bank monetary rule. We construct an empirical model of the monetary rule, justify the choice and the inclusion of explanatory variables, we analyze the statistical properties of time series and verify the alternative forms of econometric models. Our analysis showed that the development of CNB repo rate in the reporting period can be explained by the past and present evolution of three explanatory variables: the yearly inflation rate, the exchange rate and the ECB repo rate. 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 delay of the yearly inflation rate. The obtained results indicate that in determining the CNB repo rate the expected future level of the yearly inflation rate does not play important role and the last yearly inflation rate is more important than its present level.