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The Czech Exchange Rate Floor: Depreciation without Inflation?

Author

Listed:
  • Jaromír Baxa

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic
    Academy of Sciences of the Czech Republic, Institute of Information Theory and Automation, Pod Vodárenskou věží 4, 182 08, Prague, Czech Republic)

  • Tomáš Šestořád

    (Academy of Sciences of the Czech Republic, Institute of Information Theory and Automation, Pod Vodárenskou věží 4, 182 08, Prague, Czech Republic
    Czech National Bank, Macroeconomic Forecasting Division, Na Příkopě 28, 115 03 Prague 1, Czech Republic)

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.

Suggested Citation

  • Jaromír Baxa & Tomáš Šestořád, 2019. "The Czech Exchange Rate Floor: Depreciation without Inflation?," Working Papers IES 2019/6, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised May 2019.
    • Handle: RePEc:fau:wpaper:wp2019_06
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    Cited by:

    1. Patricia Amalia MERCEA (HANDRO), 2020. "ANALYSIS OF THE MONETARY POLICY TRANSMISSION INTO CEEs COUNTRIES. A VAR APPROACH," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 5(3), pages 90-102.
    2. Milan Deskar-Škrbić & Davor Kunovac, 2020. "Twentieth Anniversary of the Euro: Why are Some Countries Still Not Willing to Join? Economists’ View," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(2), pages 242-262, June.
    3. Rodriguez, Gabriel & Castillo B., Paul & Calero, Roberto & Salcedo Cisneros, Rodrigo & Ataurima Arellano, Miguel, 2024. "Evolution of the exchange rate pass-through into prices in Peru: An empirical application using TVP-VAR-SV models," Journal of International Money and Finance, Elsevier, vol. 142(C).
    4. Jakub Dostál, 2020. "Revealed value of volunteering: A volunteer centre network," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 91(2), pages 319-345, June.

    More about this item

    Keywords

    Exchange rate commitment; exchange rate pass-through; time-varying parameters; VAR; zero lower bound;
    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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