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

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  • Volha Audzei
  • Frantisek Brazdik

Abstract

The traditional view of the exchange rate as a shock absorber has been challenged by a number of studies. Therefore, it is not surprising to identify economies in which exchange rate movements fuel business cycle volatility. We assess whether the Czech economy belongs to this group. We analyze the relations between the exchange rate and other macroeconomic variables within the VAR framework using the sign restriction technique as proposed by Uhlig (2005). The results of variance decomposition of the exchange rate do not allow us to reject a shock-absorbing role of the exchange rate for the Czech economy. To assess the robustness of the results, we also examined the relation between monetary policy and exchange rate volatility. We conclude that the shock-absorbing nature of the exchange rate prevails over shock generating one.

Suggested Citation

  • Volha Audzei & Frantisek Brazdik, 2012. "Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber," Working Papers 2012/09, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2012/09
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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. 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.
    3. Skorepa, Michal & Komarek, Lubos, 2015. "Sources of asymmetric shocks: The exchange rate or other culprits?," Economic Systems, Elsevier, vol. 39(4), pages 654-674.
    4. repec:cnb:ocpubv:as17 is not listed on IDEAS
    5. repec:cnb:ocpubv:rb13/1 is not listed on IDEAS
    6. repec:cnb:ocpubv:rb13/2 is not listed on IDEAS
    7. repec:cnb:ocpubv:rb15/2 is not listed on IDEAS
    8. repec:cnb:ocpubv:rb15/1 is not listed on IDEAS
    9. repec:cnb:ocpubv:rb14/1 is not listed on IDEAS
    10. repec:cnb:ocpubv:rb12/2 is not listed on IDEAS
    11. repec:cnb:ocpubv:as16 is not listed on IDEAS
    12. repec:cnb:ocpubv:rb14/2 is not listed on IDEAS
    13. repec:cnb:ocpubv:as15 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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