Inflation and Monetary Policy: Lessons from the Recent Inflationary Episode

The aim of the dissertation is to assess the evolution of inflation against the background of global factors and the effectiveness of monetary policy in recent decades. Since the late 1980s, the world economy has experienced a significant reduction in inflation. Several factors have had a positive impact on this development, in addition to the widely acknowledged contribution of the shift to a monetary-policy regime of inflation targeting. The first has been the globalisation and digitalisation of the world economy, which has caused an increase in competition and labour productivity combined with a reduction in regulation, tariff barriers and administrative burdens. The labour market also provided a positive influence on inflation. Thanks to favourable demographics combined with globalisation, there was a sufficient working-age labour force on the world labour market to keep wages and costs relatively low for firms. At the same time, geopolitical stability was achieved for the first time in a long period. However, these factors are now fading away and may pose a risk to future inflation developments. In terms of the effectiveness of monetary policy, the dissertation finds three main limitations. The change in the monetary policy framework has resulted in the exclusion of money from monetary policy decisions. However, money is not neutral in either the short or long run, and especially during periods of high inflation, it provides important information about economic developments. The second limitation is the insufficient role of fiscal policy in the monetary policy framework. The thesis shows that fiscal deficits are directly responsible for a significant part of the rise in inflation. The third limitation is the role of inflation expectations, which the current monetary policy framework considers rational. The dissertation uses data from the Czech economy to show through Granger causality that inflation expectations, at least in the domestic economy, are adaptive and strongly influenced by the current inflation rate. Moreover, economic agents do not adapt their behaviour to their expectations. Their misinterpretation and overly significant role within the monetary policy framework can lead to incorrect decision-making.