Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?

Francesca Caselli

Review of Economics and Institutions, 2017, vol. 8, issue 2

Abstract: To fight deflationary pressures at the zero lower bound, in November 2013, the Czech National Bank (CNB) introduced a one-sided floor on the exchange rate, as an additional monetary policy instrument. This paper investigates the impact of the FX floor on inflation in the Czech Republic, by comparing actual inflation with counterfactuals in the absence of the exchange rate floor. Three different empirical strategies are implemented: an event study, difference-in-difference regressions and a synthetic control method. The empirical results provide evidence that the exchange rate was effective in fighting deflationary pressures and prevented inflation from going into negative territory. The magnitude of the effect ranges between 0.5 to 1.5 percentage points. The results are robust to different econometric specifications.

Keywords: Foreign exchange interventions; Exchange rate; Synthetic control method (search for similar items in EconPapers)
JEL-codes: E58 F31 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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