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The Exchange Rate as an Instrument at Zero Interest Rates: The Case of the Czech Republic
Franta, Michal ; Holub, Tomáš ; Král, Petr ; Kubicová, Ivana ; Šmídková, Kateřina ; Vašíček, Bořek
This study examines the use of the exchange rate by the Czech National Bank as a monetary policy instrument at the zero lower bound on interest rates. It provides a review of the economic literature on unconventional monetary policy instruments and particularly on the possibility of using the exchange rate. It explains the CNB’s reasons for further easing monetary policy and for choosing the exchange rate instrument and its specific level, and discusses its expected benefits in the case of the Czech Republic. It also explains why the CNB ultimately decided to transparently declare a one-sided exchange rate commitment with potentially unlimited foreign exchange interventions. The article concludes by assessing the impacts of the exchange rate weakening on the Czech economy to date, as compared to what the CNB had expected, and by describing the public debate of the CNB’s action and related changes in its communication strategy.
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Sources of Asymmetric Shocks: The Exchange Rate or Other Culprits?
Skořepa, Michal ; Komárek, Luboš
We analyze and quantify the determinants of asymmetric shocks showing up in the form of medium-term real exchange rate (RER) changes. First, we discuss sources of asymmetric shocks causing exchange rate variability and the role of the RER as a shock generator. Second, we use data for 21 advanced and late-transition economies to gauge the extent to which medium-term bilateral real exchange rate variability can be explained by various fundamental factors. Using Bayesian model averaging, we find that out of 22 factors under consideration, four types of dissimilarities within a given pair of economies are likely to be included in the true model: dissimilarities as regards (i) financial development, (ii) per capita income growth, (iii) central bank independence, and (iv) the structure of the economy. A regression based on these four factors indicates that these factors explain about one third of the behavior of the three-year RER variability for the whole sample and almost half of the behavior of the three-year RER variability for the RERs involving specifically the euro. The remaining part of the total variability represents an estimate of the influence of the exchange rate market itself (together with the influence of fundamental price level or nominal exchange rate determinants not captured by the regressors used).
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Foreign exchange interventions under inflation targeting: the Czech experience
Holub, Tomáš
This paper discusses the role of foreign exchange interventions in the inflation-targeting regime, focusing on the Czech experience since 1998. It proposes criteria for assessing whether the interventions are consistent with the inflation targeting. It is also stressed that the literature on managed floating usually ignores the difficulty in defining clear procedural rules for the interventions.
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The behavioural equilibrium exchange rate of the czech koruna
Komárek, Luboš ; Melecký, Martin
The behavioural equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for non-stationary time series. The potential determinants of the real equilibrium exchange rate considered are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption and the degree of openness.
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Beyond Balassa - Samuelson: real appreciation in tradables in transtion countries
Cincibuch, Martin ; Podpiera, Jiří
Using the simple arbitrage model, writers of this work decompose real appreciation in tradables in three Central European countries between the pricing-to-market component (disparity) and the local relative price component (substitution ratio). Appreciation is only partially explained by local relative prices. The rest is absorbed by disparity, depending on the size of the no-arbitrage band. The observed disparity fluctuates in a wider band for differentiated products than for a commodity like goods.
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ERM II membership - the view of the accession countries
Komárek, Luboš ; Čech, Zdeněk ; Horváth, Roman
This report examines the implications of membership in ERM2. The experience of the present eurozone members with ERM/ERM2 membership shows that none of them faced a significant challenge in the two-year “evaluation” period in terms of the exchange rate stability convergence criterion. This could also be attributable to the stability policies prescribed by the Maastricht Treaty.
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