Three alternative policy rules are contrasted in a model framework in this
paper. Such simulation and their results provide a background for policy de
bate on the properties of alternative strategies of Czech monetary policy.
The specific features of an economic transition period are reflected in an
extended set of measures when comparing the policy rules. The paper present
s the results of these simulations, including tests of sensitivity to calib
ration, and summarizes the conclusions. First, any policy rules that combin
e several targets are inferior to inflation and exchange-rate rules since t
hey are less efficient in ensuring nominal convergence, and more costly in
terms of output, interest-rate and external-balance volatility. Second, exc
hange-rate rules are less efficient and less costly in terms of output vola
tility. Inflation policy rules are more efficient and less costly in terms
of interest-rate volatility. This result illustrates that it is very diffic
ult to hit upon a single superior strategy. The final choice depends on pre
ferences. Third, exchange-rate and inflation policy rules produce gradual r
eal appreciation. Under exchange-rate rules, real appreciation is due to th
e inflation differential. Under inflation rules, it is due to gradual nomin
al appreciation. This result, it is argued, supports the author's assertion
that it is not possible for a central bank to fix any real. variable with
its strategy.