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

_IMF Working Papers, September 20, 2017_

## Source details

**Canonical URL:** [Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?](https://www.imf.org/en/publications/wp/issues/2017/09/20/did-the-exchange-rate-floor-prevent-deflation-in-the-czech-republic-45249)

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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

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### 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

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## Content in this bundle

- **Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?, WP/17/206, September 2017**
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_Source: https://www.imf.org/en/publications/wp/issues/2017/09/20/did-the-exchange-rate-floor-prevent-deflation-in-the-czech-republic-45249_