Foreign Exchange Interventions at the Zero Lower Bound in the Czech Economy: A DSGE Approach

Simona Malovana

No 2015/13, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: The paper contributes to understanding the economic dynamics at the zero lower bound and the exchange rate movements under different central bank intervention regimes. It provides a theoretical framework for modeling foreign exchange interventions at the ZLB within a dynamic general equilibrium model. We find a pronounced volatility of real and nominal macroeconomic variables in response to the domestic demand shock, the foreign demand and financial shocks and the terms-of-trade shock at the ZLB. This effects become severe in response to highly persistent shocks which leads to stronger reaction of variables and prolong period of binding constraint. The FX interventions have proven to be effective in mitigating deflationary pressures and recovering the economic activity in response to all examined shocks at the ZLB. In this sense, the central bank achieves the best performance by fixing the nominal exchange rate temporarily at the ZLB.

Keywords: zero lower bound; foreign exchange interventions; dynamic stochastic general equilibrium; Bayesian estimation; exchange rate and price dynamics (search for similar items in EconPapers)
JEL-codes: C11 E31 E43 E52 E58 F31 (search for similar items in EconPapers)
Pages: 50pages
Date: 2015-05, Revised 2015-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-tra
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Citations: View citations in EconPapers (2)

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