The Exchange Rate as an Instrument at Zero Interest Rates: The Case of the Czech Republic

Michal Franta, Tomas Holub, Petr Král, Ivana Kubicova, Katerina Smidkova and Bořek Vašíček ()

Research and Policy Notes from Czech National Bank, Research and Statistics Department

Abstract: This study examines the use of the exchange rate by the Czech National Bank as a monetary policy instrument at the zero lower bound on interest rates. It provides a review of the economic literature on unconventional monetary policy instruments and particularly on the possibility of using the exchange rate. It explains the CNB’s reasons for further easing monetary policy and for choosing the exchange rate instrument and its specific level, and discusses its expected benefits in the case of the Czech Republic. It also explains why the CNB ultimately decided to transparently declare a one-sided exchange rate commitment with potentially unlimited foreign exchange interventions. The article concludes by assessing the impacts of the exchange rate weakening on the Czech economy to date, as compared to what the CNB had expected, and by describing the public debate of the CNB’s action and related changes in its communication strategy.

Keywords: Asymmetric exchange rate commitment; deflation; exchange rate; foreign exchange interventions; inflation expectations; monetary policy; unconventional instruments; zero lower bound (search for similar items in EconPapers)
JEL-codes: E31 E37 E58 F31 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:cnb:rpnrpn:2014/03

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