The paper has examined the impact of both internal and external factors on the net inflation in the Czech Republic in the time horizon 1995:1 - 2000:12. The framework of the analysis are the extended Phillips curve models. Cross correlograms of stationary data (first differences of year-on-year changes) have revealed by far the decisive role of external factors (import prices, import prices-group 3, nominal effective exchange rate). To reveal the correct temporal linkage between these variables on the one side and the inflation rate on the other side the distributed lag models (finite and polynomial) have been constructed and evaluated. Impulse response functions and variance decompositions for selected VAR models complete the analysis. The main message from this paper is, in the intention of the papers of Ball, that in the small open economies inflation targeting can be dangerous.

Keywords: extended Phillips curve, distributed lag models, impulse response functions, variance decomposition