Balance Sheet Implications of the Czech National Bank's Exchange Rate Commitment

We present projections of the Czech National Bank's balance sheet after the discontinuation of the exchange rate commitment. Our model addresses the situation of a large central bank balance sheet with assets consisting almost exclusively of foreign exchange reserves in the circumstances of a catching-up economy exhibiting an exchange rate appreciation trend. Apart from the baseline projection, several counter-factual scenarios are discussed. The scenarios concern the evolution of the balance sheet in the cases of no exchange rate commitment and a commitment with earlier discontinuation. The simulated counter-factual duration of negative CNB equity, and thus the period of no profit distribution to the government, does not differ substantially from the baseline. The fiscal implications of the exchange rate commitment are thus estimated to be relatively small and related only to the period after the year 2030. Our stochastic simulations, however, show that the uncertainty bands are very wide. In addition, we show that the simulation tool can be employed to discuss the consequences of a long-run decline in currency in circulation, the composition of the asset side and the resumption of foreign exchange income sales by the central bank.