Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/203225
Authors: 
Baxa, Jaromír
Šestořád, Tomáš
Year of Publication: 
2019
Series/Report no.: 
IES Working Paper 06/2019
Abstract: 
After the introduction of an exchange rate commitment and an immediate 7% depreciation of the Czech koruna of in 2013, output growth resumed but inflation remained low. Consequently, the Czech National Bank did not return policy to normal for more than three years. Using a time-varying parameter VAR model with stochastic volatility, we show that this was not surprising. The exchange rate passthrough to prices had been rather low and gradually decreasing since the early 2000s, suggesting limited potential effects of the exchange rate commitment on inflation. On the other hand, the pass-through to output growth increased. These results hold even when the period of the exchange rate floor and the zero lower bound is excluded from the sample, and they are robust to other sensitivity checks. Our results are consistent either with a flattened Phillips curve, or rising quality of the Czech exports and participation in global value chains, or a small effect of the exchange rate commitment on inflation expectations when not paired with temporary price-level targeting. Moreover, we highlight the usefulness of models accounting for time variation of parameters for policy analysis.
Subjects: 
Exchange rate commitment
exchange rate pass-through
time-varying parameters
VAR
zero lower bound
JEL: 
C32
E52
F41
Document Type: 
Working Paper
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