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Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber

Author

Listed:
  • Volha Audzei

    (CERGE-EI, Prague)

  • Frantisek Brazdik

    (Czech National Bank)

Abstract

We analyze the contribution of the real exchange rate to the macroeconomic volatility of Czech economy and its role in cushioning economic disturbances. Results from a two-country structural VAR model do not allow us to reject a shock-absorbing role of the real exchange rate for the Czech economy. This result is robust to model extensions. Further analysis shows that domestic monetary policy and the real exchange rate are responsive to asymmetric and real exchange rate shocks in the short term, while the contribution of non-policy shocks is prevailing in the long term. This supports the view that the Czech National Bank’s policy is predictable. Low transmission of a real exchange rate shock to output and price volatility is consistent with the theoretical role of the exchange rate as a shock absorber.

Suggested Citation

  • Volha Audzei & Frantisek Brazdik, 2015. "Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(5), pages 391-410, October.
    • Handle: RePEc:fau:fauart:v:65:y:2015:i:5:p:391-410
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    References listed on IDEAS

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    Cited by:

    1. Vesna Martin, 2018. "The Exchange Rate Commitment As Additional Instrument Of Monetary Policy In Czech Republic, Switzerland And Israel," Ekonomske ideje i praksa, Faculty of Economics and Business, University of Belgrade, issue 31, pages 41-57, December.
    2. repec:cnb:ocpubv:rb15/2 is not listed on IDEAS
    3. repec:cnb:ocpubv:rb12/2 is not listed on IDEAS
    4. repec:cnb:ocpubv:as16 is not listed on IDEAS
    5. repec:cnb:ocpubv:as15 is not listed on IDEAS
    6. Marek A. Dąbrowski & Łukasz Kwiatkowski & Justyna Wróblewska, 2020. "Sources of Real Exchange Rate Variability in Central and Eastern European Countries: Evidence from Structural Bayesian MSH-VAR Models," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 12(4), pages 369-412, December.
    7. Skorepa, Michal & Komarek, Lubos, 2015. "Sources of asymmetric shocks: The exchange rate or other culprits?," Economic Systems, Elsevier, vol. 39(4), pages 654-674.
    8. repec:cnb:ocpubv:as17 is not listed on IDEAS
    9. repec:cnb:ocpubv:rb13/1 is not listed on IDEAS
    10. repec:cnb:ocpubv:rb13/2 is not listed on IDEAS
    11. repec:cnb:ocpubv:rb15/1 is not listed on IDEAS
    12. repec:cnb:ocpubv:rb14/1 is not listed on IDEAS
    13. repec:cnb:ocpubv:rb14/2 is not listed on IDEAS

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    More about this item

    Keywords

    Czech Republic; exchange rates; sign restrictions; structural vector autoregression;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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