IMF Working Papers

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

By Francesca Caselli

September 20, 2017

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Francesca Caselli. Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Exchange rates, Foreign exchange, Foreign exchange intervention, Inflation, Inflation targeting, Monetary policy, Prices

Keywords: CNB FX operations, Core inflation in the Czech Republic, Exchange rate, Exchange rates, Foreign exchange intervention, FX floor, FX intervention, Global, Import price inflation, Inflation, Inflation expectation, Inflation targeting, Inflation-unemployment relationship, Synthetic control method, WP

Publication Details

  • Pages:

    30

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2017/206

  • Stock No:

    WPIEA2017206

  • ISBN:

    9781484319291

  • ISSN:

    1018-5941

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