Publication detail

The Czech Exchange Rate Floor: Depreciation without Inflation?

Author(s): PhDr. Jaromír Baxa Ph.D.,
Mgr. Ing. Tomáš Šestořád ,
Type: Others
Year: 2019
Number: 1
Published in: CNB Working Paper 1/2019
Publishing place: Praha
Keywords: Exchange rate commitment, exchange rate pass-through, time-varying parameters, VAR, zero lower bound
JEL codes: C32, E52, F41
Suggested Citation:
Grants: GACR 402/16-02392S Competitiveness and Exchange Rate: Institutions and Innovations
Abstract: After the introduction of an exchange rate commitment and an immediate 7% depreciation of the Czech koruna of in 2013, output growth resumed but inflation remained low. Consequently, the Czech National Bank did not return policy to normal for more than three years. Using a time-varying parameter VAR model with stochastic volatility, we show that this was not surprising. The exchange rate pass-through to prices had been rather low and gradually decreasing since the early 2000s, suggesting limited potential effects of the exchange rate commitment on inflation. On the other hand, the pass-through to output growth increased. These results hold even when the period of the exchange rate floor and the zero lower bound is excluded from the sample, and they are robust to other sensitivity checks. Our results are consistent either with a flattened Phillips curve, or rising quality of the Czech exports and participation in global value chains, or a small effect of the exchange rate commitment on inflation expectations when not paired with temporary price-level targeting. Moreover, we highlight the usefulness of models accounting for time variation of parameters for policy analysis.




Patria Finance
Česká Spořitelna