IDEAS home Printed from https://ideas.repec.org/a/fau/fauart/v65y2015i5p391-410.html
   My bibliography  Save this article

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

Author

Listed:
  • Volha Audzei

    (CERGE-EI, Prague)

  • Frantisek Brazdik

    (Czech National Bank)

Abstract

We analyze the contribution of the real exchange rate to the macroeconomic volatility of Czech economy and its role in cushioning economic disturbances. Results from a two-country structural VAR model do not allow us to reject a shock-absorbing role of the real exchange rate for the Czech economy. This result is robust to model extensions. Further analysis shows that domestic monetary policy and the real exchange rate are responsive to asymmetric and real exchange rate shocks in the short term, while the contribution of non-policy shocks is prevailing in the long term. This supports the view that the Czech National Bank’s policy is predictable. Low transmission of a real exchange rate shock to output and price volatility is consistent with the theoretical role of the exchange rate as a shock absorber.

Suggested Citation

  • Volha Audzei & Frantisek Brazdik, 2015. "Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(5), pages 391-410, October.
  • Handle: RePEc:fau:fauart:v:65:y:2015:i:5:p:391-410
    as

    Download full text from publisher

    File URL: http://journal.fsv.cuni.cz/storage/1340_audzei.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rafiq, M.S. & Mallick, S.K., 2008. "The effect of monetary policy on output in EMU3: A sign restriction approach," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1756-1791, December.
    2. Gert Peersman, 2011. "The Relative Importance of Symmetric and Asymmetric Shocks: The Case of United Kingdom and Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(1), pages 104-118, February.
    3. Renée Fry & Adrian Pagan, 2011. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 938-960, December.
    4. Rogers, John H., 1999. "Monetary shocks and real exchange rates," Journal of International Economics, Elsevier, vol. 49(2), pages 269-288, December.
    5. Michal Andrle & Tibor Hledik & Ondra Kamenik & Jan Vlcek, 2009. "Implementing the New Structural Model of the Czech National Bank," Working Papers 2009/2, Czech National Bank.
    6. Michal Skorepa, 2008. "A Simple, Model-Independent Analysis of Reasons for Non-Fulfillment of the Declared Inflation Target," Occasional Publications - Chapters in Edited Volumes, in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 3, pages 35-46, Czech National Bank.
    7. Jarek Hurnik & Ondra Kamenik & Jan Vlcek, 2008. "The History of Inflation Targeting in the Czech Republic through Optic of a Dynamic General Equilibrium Model," Occasional Publications - Chapters in Edited Volumes, in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 8, pages 102-116, Czech National Bank.
    8. Amisano, Gianni & Giammarioli, Nicola & Stracca, Livio, 2009. "EMU and the adjustment to asymmetric shocks: the case of Italy," Working Paper Series 1128, European Central Bank.
    9. Berg, Tim Oliver, 2010. "Exploring the international transmission of U.S. stock price movements," MPRA Paper 23977, University Library of Munich, Germany.
    10. Juan F. Rubio-Ramirez & Daniel F. Waggoner & Tao Zha, 2005. "Markov-switching structural vector autoregressions: theory and application," FRB Atlanta Working Paper 2005-27, Federal Reserve Bank of Atlanta.
    11. Farrant, Katie & Peersman, Gert, 2006. "Is the Exchange Rate a Shock Absorber or a Source of Shocks? New Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 939-961, June.
    12. Juraj Antal & Zuzana Antonicova & Jan Babecky & Michal Hlavacek & Tomas Holub & Roman Horvath & Jarek Hurnik & Ondra Kamenik & Karel Musil & Jiri Podpiera & Lubos Ruzicka & Michal Skorepa & Katerina S, 2008. "Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007," Occasional Publications - Edited Volumes, Czech National Bank, number 01 edited by Katerina Smidkova, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jan Bruha & Jiri Polansky & Jaromir Tonner & Stanislav Tvrz & Osvald Vasicek & Jan Babecky & Kamil Galuscak & Lubomir Lizal & Diana Zigraiova, 2016. "Topics in Labour Markets," Occasional Publications - Edited Volumes, Czech National Bank, edition 1, volume 14, number rb14/1 edited by Jan Babecky, March.
    2. Oxana Babecka Kucharcukova & Alexis Derviz & Vaclav Hausenblas & Michal Hlavacek & Mark Joy & Narcisa Kadlcakova & Lubos Komarek & Zlatuse Komarkova & Tomas Konecny & Ivana Kubicova & Jitka Lesanovska, 2014. "Macroprudential Research: Selected Issues," Occasional Publications - Edited Volumes, Czech National Bank, edition 2, volume 12, number rb12/2 edited by Jan Babecky & Borek Vasicek, March.
    3. Katerina Arnostova & Oxana Babecka Kucharcukova & Jan Babecky & Vojtech Belling & Sona Benecka & Jan Bruha & Martin Gurtler & Tomas Holub & Eva Hromadkova & Lubos Komarek & Zlatuse Komarkova & Petr Kr, 2016. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2016," Occasional Publications - Edited Volumes, Czech National Bank, number as16 edited by Katerina Arnostova & Lucie Matejkova, March.
    4. Skorepa, Michal & Komarek, Lubos, 2015. "Sources of asymmetric shocks: The exchange rate or other culprits?," Economic Systems, Elsevier, vol. 39(4), pages 654-674.
    5. Miroslav Plasil & Jakub Seidler & Petr Hlavac & Volha Audzei & Jakub Mateju & Michal Kejak & Simona Malovana & Jan Frait, 2016. "Financial Cycles and Macroprudential and Monetary Policies," Occasional Publications - Edited Volumes, Czech National Bank, edition 2, volume 14, number rb14/2 edited by Jan Babecky & Michal Hlavacek, March.
    6. Marek A. Dąbrowski & Łukasz Kwiatkowski & Justyna Wróblewska, 2020. "Sources of Real Exchange Rate Variability in Central and Eastern European Countries: Evidence from Structural Bayesian MSH-VAR Models," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 12(4), pages 369-412, December.
    7. Katerina Arnostova & Tomas Adam & Oxana Babecka Kucharcukova & Jan Babecky & Vojtech Belling & Sona Benecka & Jan Bruha & Martin Gurtler & Tibor Hledik & Tomas Holub & Eva Hromadkova & Lubos Komarek &, 2017. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2017," Occasional Publications - Edited Volumes, Czech National Bank, number as17 edited by Katerina Arnostova & Lucie Matejkova, March.
    8. Frantisek Brazdik & Jan Bruha & Michal Franta & David Havrlant & Tibor Hledik & Tomas Holub & Zuzana Humplova & Frantisek Kopriva & Jiri Polansky & Marek Rusnak & Jaromir Tonner, 2015. "Forecasting," Occasional Publications - Edited Volumes, Czech National Bank, edition 1, volume 13, number rb13/1 edited by Jan Babecky & Kamil Galuscak, March.
    9. Tomas Adam & Oxana Babecka Kucharcukova & Jan Babecky & Vojtech Belling & Sona Benecka & Jan Bruha & Kamil Galuscak & Tomas Holub & Eva Hromadkova & Lubos Komarek & Zlatuse Komarkova & Kamila Kulhava , 2015. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2015," Occasional Publications - Edited Volumes, Czech National Bank, number as15 edited by Kamila Kulhava & Lucie Matejkova, March.
    10. Michal Andrle & Oxana Babecka Kucharcukova & Jaromir Baxa & Jan Bruha & Peter Claeys & Jan Filacek & Jakub Mateju & Miroslav Plasil & Serhat Solmaz & Borek Vasicek, 2015. "Monetary Policy Challenges in a Low-Inflation Environment," Occasional Publications - Edited Volumes, Czech National Bank, edition 2, volume 13, number rb13/2 edited by Jan Babecky & Michal Franta, March.
    11. Jan Bruha & Jaromir Tonner & Mojmir Hampl & Tomas Havranek & Mirko Djukic & Tibor Hledik & Jiri Polansky & Ljubica Trajcev & Jan Vlcek & Ruslan Aliyev & Dana Hajkova & Ivana Kubicova, 2017. "Effects of Monetary Policy," Occasional Publications - Edited Volumes, Czech National Bank, edition 2, volume 15, number rb15/2 edited by Jan Babecky & Michal Franta & Jan Bruha, March.
    12. Kamil Galuscak & Ivan Sutoris & Oxana Babecka Kucharcukova & Jan Bruha & Filip Novotny & Volha Audzei & Frantisek Brazdik, 2017. "Trade and External Relations," Occasional Publications - Edited Volumes, Czech National Bank, edition 1, volume 15, number rb15/1 edited by Jan Babecky & Jan Bruha, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Audzei, Volha & Brázdik, František, 2018. "Exchange rate dynamics and their effect on macroeconomic volatility in selected CEE countries," Economic Systems, Elsevier, vol. 42(4), pages 584-596.
    2. Volha Audzei & Frantisek Brazdik, 2015. "Exchange Rate Dynamics and its Effect on Macroeconomic Volatility in Selected CEE Countries," Working Papers 2015/07, Czech National Bank.
    3. Kamil Galuscak & Ivan Sutoris & Oxana Babecka Kucharcukova & Jan Bruha & Filip Novotny & Volha Audzei & Frantisek Brazdik, 2017. "Trade and External Relations," Occasional Publications - Edited Volumes, Czech National Bank, edition 1, volume 15, number rb15/1 edited by Jan Babecky & Jan Bruha, March.
    4. An, Lian & Kim, Gil & Ren, Xiaomei, 2014. "Is devaluation expansionary or contractionary: Evidence based on vector autoregression with sign restrictions," Journal of Asian Economics, Elsevier, vol. 34(C), pages 27-41.
    5. Matteo Barigozzi & Antonio M. Conti & Matteo Luciani, 2014. "Do Euro Area Countries Respond Asymmetrically to the Common Monetary Policy?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(5), pages 693-714, October.
    6. Scholl, Almuth & Uhlig, Harald, 2008. "New evidence on the puzzles: Results from agnostic identification on monetary policy and exchange rates," Journal of International Economics, Elsevier, vol. 76(1), pages 1-13, September.
    7. Yu-Hsi Chou, 2017. "Dissecting Exchange Rates and Fundamentals in the Modern Floating Era: The Role of Permanent and Transitory Shocks," Review of International Economics, Wiley Blackwell, vol. 25(1), pages 165-194, February.
    8. Renée Fry & Adrian Pagan, 2011. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 938-960, December.
    9. Gehrke, Britta & Yao, Fang, 2017. "Are supply shocks important for real exchange rates? A fresh view from the frequency-domain," Journal of International Money and Finance, Elsevier, vol. 79(C), pages 99-114.
    10. Elekdag, Selim & Han, Fei, 2015. "What drives credit growth in emerging Asia?," Journal of Asian Economics, Elsevier, vol. 38(C), pages 1-13.
    11. Caputo, Rodrigo & Pedersen, Michael, 2020. "The changing nature of the real exchange rate: The role of central bank preferences," Economic Modelling, Elsevier, vol. 90(C), pages 445-464.
    12. Kiptui, Moses, 2015. "Sources of Exchange Rate Fluctuations in Kenya: The Relative Importance of Real and Nominal Shocks," MPRA Paper 61515, University Library of Munich, Germany.
    13. Lian An & Mark A. Wynne & Ren Zhang, 2020. "Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach," Globalization Institute Working Papers 379, Federal Reserve Bank of Dallas.
    14. Michael Artis, 2008. "What do we now know about currency unions?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 1(1), pages 13-29.
    15. Timo Bettendorf, 2017. "Idiosyncratic and international transmission of shocks in the G7: Does EMU matter?," Review of International Economics, Wiley Blackwell, vol. 25(4), pages 856-890, September.
    16. Pao-Lin Tien, 2009. "Using Long-Run Restrictions to Investigate the Sources of Exchange Rate Fluctuations," Wesleyan Economics Working Papers 2009-004, Wesleyan University, Department of Economics.
    17. Marek A. Dąbrowski & Łukasz Kwiatkowski & Justyna Wróblewska, 2020. "Sources of Real Exchange Rate Variability in Central and Eastern European Countries: Evidence from Structural Bayesian MSH-VAR Models," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 12(4), pages 369-412, December.
    18. Montinari, Letizia & Stracca, Livio, 2016. "Trade, finance or policies: What drives the cross-border spill-over of business cycles?," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 131-148.
    19. Andreas Bachmann & Stefan Leist, 2013. "Sudden stop regimes and output: a Markov switching analysis," Diskussionsschriften dp1307, Universitaet Bern, Departement Volkswirtschaft.
    20. Njindan Iyke, Bernard, 2015. "Assessing the Effects of Housing Market Shocks on Output: The Case of South Africa," MPRA Paper 69610, University Library of Munich, Germany, revised 01 Feb 2016.

    More about this item

    Keywords

    Czech Republic; exchange rates; sign restrictions; structural vector autoregression;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fau:fauart:v:65:y:2015:i:5:p:391-410. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/icunicz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Natalie Svarcova (email available below). General contact details of provider: https://edirc.repec.org/data/icunicz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.