Aleš Michl: The target

Speech by Mr Aleš Michl, Governor of the Czech National Bank, at the Czech National Bank Discussion Forum 2024, University of Pardubice, Pardubice, 23 April 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I will start with mathematics and physics, specifically celestial mechanics, the science of the motion of celestial bodies. One of the tasks of celestial mechanics is to calculate and predict the motion of three bodies that interact gravitationally, for example, the sun, the earth and the moon. To this day, it's still a difficult mathematical and physical problem to solve. Under certain assumptions, such as one body having negligible mass compared to the others, the problem can be solved. The issue is explored in popular form in The Three-Body Problem by Chinese science fiction author Liu Cixin.

In the economy, we also have three bodies: the private market, the government and the central bank. However, modelling the relationships between them and predicting future developments is an even harder task than three-body motion in physics. It requires many simplifications and assumptions. Unlike in physics, there are no hard and fast laws such as the law of gravity or the law of action and reaction.

Economic predictions sometimes don't work out. After all, even the knowledge of economists isn't as constant as that of physicists. Streams of economics are sometimes very wide of the mark.

In the first half of 2022, prices in the Czech Republic grew at the fastest rate in history, leaving aside the transformation period. The annual inflation rate was a terrifying 18% in September 2022. 

The whole world was hit by rising costs, especially rising energy prices. However, the Czech Republic had the highest inflation in the European Union at the time, even adjusted for this cost shock ("core inflation"). Some specific and unique errors must therefore have been made in our country in the past.