Scenario Analysis for the Czech Republic: Using the Integrated Policy Framework (IPF)

Selected Issues Papers, April 23, 2026

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Applies the IMF’s Integrated Policy Framework (IPF) to the Czech Republic to support use of scenario analysis at the Czech National Bank (CNB).
Uses an extended version of the QIPF model to broaden analysis beyond traditional external shock scenarios to also include:
- domestic fiscal policy shocks
- central bank balance sheet normalization

Identifies shallowness of FX markets as the main relevant friction under the IPF.
Notes that inflation expectations are generally well anchored, but "they can nevertheless deviate from the inflation target for extended periods."

In the event of a global risk-off outflow shock, the CNB can improve macro stabilization through a combined use of reserves and interest rate policy.
Refocusing fiscal stimulus towards more productive uses greatly reduces the degree of monetary policy tightening needed to stabilize inflation at target.
Balance sheet normalization is optimally implemented in a preannounced and gradual manner; potential currency appreciation can in principle be mitigated through a slightly lower policy rate.

Combine foreign reserve management with interest rate policy to enhance macro stabilization during global risk-off outflow shocks.
Reorient fiscal stimulus toward more productive spending to lessen the required monetary policy tightening for inflation stabilization.
Implement balance sheet normalization via preannouncement and gradualism; consider a slightly lower policy rate as a tool to mitigate potential currency appreciation during normalization.

Robustness Check of FX Market Shallowness
- Robustness Check of FX Market Shallowness (Markdown version)
- Robustness Check of FX Market Shallowness (PDF)