Work detail

What is the equilibrium exchange rate of the Czech koruna?

Author: Mgr. Pavel Jančovič
Year: 2017 - summer
Leaders: PhDr. Jaromír Baxa Ph.D.
Work type: Finance, Financial Markets and Banking
Language: English
Pages: 90
Awards and prizes:
Abstract: The aim of this thesis is to estimate bilateral equilibrium exchange rate of the Czech koruna
relative to Euro and to determine if the Czech currency is undervalued or overvalued relative
to the market equilibrium. We employ fundamental (FEER) and behavioral (BEER)
equilibrium exchange rate models, which enables to measure the currency position relative to
the market rate. To tackle the uncertainty of the implied equilibrium exchange rates that differ
among alternative specifications of the models, we aggregate the estimates via principal
components analysis. The perception on the market is that Czech koruna is undervalued, since
the intervention regime imposed by the Czech National Bank in the 2013, was defending the
exchange rate floor of 27 Czech korunas to Euro. Then, we extend conventional specifications
of BEER models for variables representing exchange rate interventions and forward rates
offered on the market because both can have protracted effects not only on spot rates but on
adjustment towards long-term equilibrium as well. The original models with fundamental
factors show equilibrium exchange rate near to 25 CZK/EUR. However, extended models with
interventions show higher equilibrium exchange rate, near to 27 CZK/EUR. Thus, there is
possibility of slow adjustment near to the fundamental equilibrium.


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