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Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber

Volha Audzei and František Brázdik

Working Papers from Czech National Bank

Abstract: The traditional view of the exchange rate as a shock absorber has been challenged by a number of studies. Therefore, it is not surprising to identify economies in which exchange rate movements fuel business cycle volatility. We assess whether the Czech economy belongs to this group. We analyze the relations between the exchange rate and other macroeconomic variables within the VAR framework using the sign restriction technique as proposed by Uhlig (2005). The results of variance decomposition of the exchange rate do not allow us to reject a shock-absorbing role of the exchange rate for the Czech economy. To assess the robustness of the results, we also examined the relation between monetary policy and exchange rate volatility. We conclude that the shock-absorbing nature of the exchange rate prevails over shock generating one.

Keywords: Czech Republic; exchange rates; sign restrictions; structural vector autoregression. (search for similar items in EconPapers)
JEL-codes: C32 E32 F31 F41 (search for similar items in EconPapers)
Date: 2012-10
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Journal Article: Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber (2015) Downloads
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