Exiting from an Exchange Rate Floor in a Small Open Economy: Balance Sheet Implications of the Czech National Bank's Exchange Rate Commitment

Michal Franta, Tomas Holub and Branislav Saxa

International Journal of Central Banking, 2022, vol. 18, issue 2, 51-105

Abstract: The aim of this paper is to model 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. As an illustration, we present projections of the Czech National Bank's balance sheet after the discontinuation of its exchange rate commitment. Apart from the baseline projection, which suggests a switch from losses to profits in 2026, several scenarios are discussed. Some relate to the exchange rate commitment itself (such as a discussion of its fiscal consequences), while others examine more general central bank balance sheet issues (such as a long-run decline in currency in circulation).

JEL-codes: E47 E52 E58 (search for similar items in EconPapers)
Date: 2022
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