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

IMF Working Papers, September 20, 2017

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

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Bibliographic details

• Authors: Francesca Caselli
• Published: September 20, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484319291.001

Summary and main finding

• 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.
• The 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.
• 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.

Empirical strategies implemented

• Event study.
• Difference-in-difference regressions.
• Synthetic control method.

Substantive findings and implications

• The FX floor helped prevent deflation at the zero lower bound by supporting inflation outcomes relative to counterfactual scenarios without the FX floor.
• The estimated impact on inflation is quantified as between 0.5 to 1.5 percentage points across specifications.
• Robustness: results hold across different econometric specifications and the three distinct empirical approaches.

Subject areas and keywords (as listed)

• 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

Content in this bundle

• Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?, WP/17/206, September 2017
  • Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?, WP/17/206, September 2017 (Markdown version)
  • Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?, WP/17/206, September 2017 (PDF)