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

Listed author(s):
  • Volha Audzei
  • Frantisek Brazdik

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.

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File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2012_09.pdf
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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2012/09.

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Date of creation: Oct 2012
Handle: RePEc:cnb:wpaper:2012/09
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  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. 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.
  3. 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, Research Department.
  4. Rogers, John H., 1999. "Monetary shocks and real exchange rates," Journal of International Economics, Elsevier, vol. 49(2), pages 269-288, December.
  5. 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, 02.
  6. 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, Research Department, number 01 edited by Katerina Smidkova.
  7. 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, Research Department.
  8. 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, Research Department.
  9. 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.
  10. Berg, Tim Oliver, 2010. "Exploring the international transmission of U.S. stock price movements," MPRA Paper 23977, University Library of Munich, Germany.
  11. Juan Francisco Rubio-Ramírez & 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.
  12. 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.
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