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Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?

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  • Francesca Caselli

Abstract

To fight deflationary pressures at the zero lower bound, in November 2013, the Czech National Bank (CNB) introduced a one-sided floor on the exchange rate, as an additional monetary policy instrument. This paper investigates the impact of the FX floor on inflation in the Czech Republic, by comparing actual inflation with counterfactuals in the absence of the exchange rate floor. Three different empirical strategies are implemented: an event study, difference-in-difference regressions and a synthetic control method. The empirical results provide evidence that the exchange rate floor was effective in fighting deflationary pressures and prevented inflation from going into negative territory. The magnitude of the effect ranges between 0.5 to 1.5 percentage points. The results are robust to different econometric specifications.

Suggested Citation

  • Francesca Caselli, 2017. "Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?," IMF Working Papers 2017/206, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/206
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    Cited by:

    1. Jan Bruha & Jaromir Tonner, 2018. "An Exchange Rate Floor as an Instrument of Monetary Policy: An Ex-Post Assessment of the Czech Experience," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(6), pages 537-549, December.
    2. Adler, Gustavo & Chang, Kyun Suk & Wang, Zijiao, 2021. "Patterns of foreign exchange intervention under inflation targeting," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(4).
    3. 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.
    4. Marek A. Dąbrowski & Jakub Janus, 2024. "Does the Interest Parity Puzzle Hold for Central and Eastern European Economies?," Open Economies Review, Springer, vol. 35(3), pages 421-456, July.
    5. Francesca Caselli & Matilde Faralli & Paolo Manasse & Ugo Panizza, 2021. "On the Benefits of Repaying," IMF Working Papers 2021/233, International Monetary Fund.
    6. Freund, Caroline & Mulabdic, Alen & Ruta, Michele, 2022. "Is 3D printing a threat to global trade? The trade effects you didn't hear about," Journal of International Economics, Elsevier, vol. 138(C).
    7. Dąbrowski, Marek A., 2019. "A new approach to estimation of actively managed component of foreign exchange reserves," MPRA Paper 95280, University Library of Munich, Germany.
    8. Francesca Caselli, 2017. "Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?," Review of Economics and Institutions, Università di Perugia, vol. 8(2).
    9. Dąbrowski, Marek A., 2021. "A novel approach to the estimation of an actively managed component of foreign exchange reserves," Economic Modelling, Elsevier, vol. 96(C), pages 83-95.
    10. Mr. David J Hofman & Mr. Marcos Chamon & Mr. Pragyan Deb & Mr. Thomas Harjes & Umang Rawat & Itaru Yamamoto, 2020. "Intervention Under Inflation Targeting--When Could It Make Sense?," IMF Working Papers 2020/009, International Monetary Fund.
    11. Mojmir Hampl & Tomas Havranek, 2020. "Central Bank Equity as an Instrument of Monetary Policy," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(1), pages 49-68, March.
    12. Mojmir Hampl & Tomas Havranek, 2018. "Central Bank Capital as an Instrument of Monetary Policy," Working Papers IES 2018/25, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2018.

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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