Frontiers of Monetary Policymaking: Adding the Exchange Rate as a Tool to Combat Deflationary Risks in the Czech Republic
IMF Working Papers, April 1, 2015
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Bibliographic details
- Authors: Ali Alichi, Jaromir Benes, Joshua Felman, Irene Feng, Charles Freedman, Douglas Laxton, Evan C Tanner, David Vávra, Hou Wang
- Published: April 1, 2015
- Series: IMF Working Papers
Overview
- Describes how the Czech National Bank (CNB) moved gradually from a fixed exchange rate regime to Inflation-Forecast Targeting.
- Focuses on the CNB’s experience adding the exchange rate as a complementary monetary policy tool to stimulate the economy and combat risks of deflation when the policy interest rate is at the zero lower bound.
- Assesses: the theoretical basis of using the exchange rate tool; the communications approach used by the CNB when announcing the new framework; and the effects thus far on inflation and output.
Key findings and emphases
- The exchange rate was added as a complementary tool when the policy interest rate approached the zero lower bound.
- The paper evaluates both theoretical underpinnings and practical outcomes of the CNB’s framework change.
- Communications strategy was a central element of the CNB’s approach to announcing and implementing the exchange rate measure.
Theoretical assessment
- The paper assesses the theoretical basis for adding an exchange rate tool to a forward-looking, inflation-forecast targeting framework.
- Analysis centers on how the exchange rate channel can be used to stimulate aggregate demand and mitigate deflationary pressures when conventional interest rate policy is constrained by the zero lower bound.
Communications approach
- The CNB’s communications approach when announcing the new framework is examined as a key element of the policy’s design and effectiveness.
- Emphasis on how commitment and clarity in communications supported the exchange rate measure’s role within the overall policy framework.
Effects on inflation and output
- The paper documents and assesses the effects thus far of the CNB’s exchange rate tool on inflation and output.
- Evaluation links observed macroeconomic outcomes to both the policy action and the CNB’s communications strategy.
Subject areas and keywords covered
- Subjects: Banking, Central bank policy rate, Exchange rate policy, Exchange rates, Financial services, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Prices.
- Keywords: central bank, central bank communications, Central bank policy rate, CNB policymaker, CNB staff, commitment of the CNB, deflation, Exchange rate policy, exchange rate tool, Exchange rates, forward guidance, forward-looking policymaking framework, Global, Inflation, Inflation Targeting, Inflation-Forecast Targeting, interest rate, interest rate path, transmission mechanism, WP, zero lower bound.
Publication metadata (selected)
- Authors: Ali Alichi, Jaromir Benes, Joshua Felman, Irene Feng, Charles Freedman, Douglas Laxton, Evan C Tanner, David Vávra, Hou Wang
- Date: April 1, 2015
- Series: Working Paper No. 2015/074
- Issue: 074
- Pages: 44
- ISBN: 9781475532371
- ISSN: 1018-5941
Source: Frontiers of Monetary Policymaking: Adding the Exchange Rate as a Tool to Combat Deflationary Risks in the Czech Republic (IMF Working Paper 2015/074, April 1, 2015).