Work detail

Estimating the Effective Lower Bound for the Czech National Bank's Policy Rate

Author: Mgr. Dominika Kolcunová
Year: 2017 - summer
Leaders: doc. PhDr. Tomáš Havránek Ph.D.
Work type: Economic Theory
Language: English
Pages: 93
Awards and prizes:
Abstract: The thesis focuses on the estimation of the effective lower bound for the
Czech National Bank’s policy rate. It is the first attempt of this kind in the
Czech context and also one of few in the international scale. The effective
lower bound is determined by the value below which holding and using cash
would be more favourable than depositing money in a bank account with a
negative rate. This bound may be approximated based on costs of storage,
insurance and transportation of cash and also based on the loss of convenience
associated with cashless payments. We estimate that costs of the former lie
in the interval from 0.2% to 0.6%. The latter, costs of loss of convenience, are
relatively high in the Czech market as they attain around 1%. The estimate
based on interest charges which present a direct cost and decrease in the
bank profitability asserts slightly lower values, in particular with respect to
a high share of deposits and repo operations at the CNB. Altogether we
get a value below -1%, in the interval (-1.5%, -1.0%), under shorter term
duration possibly lower, in the interval (-2.0%, -1.0%). The second part of
the thesis offers modelling of transmission of interest rates. The results state
that under the assumption of the average transmission over the past years
it would be necessary to decrease the interest rate below its lower bound in
order to provide sufficient monetary easing. Therefore the CNB’s exchange
rate commitment appears to be a more appropriate and effective variant for
achieving goals of monetary easing.


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