Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber

Czech National Bank, Working Paper Series, 2012-09

42 Pages Posted: 6 Jun 2013

See all articles by Volha Audzei

Volha Audzei

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

František Brázdik

Czech National Bank; Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: September 2012

Abstract

The traditional view of the exchange rate as a shock absorber has been challenged by a number of studies. Therefore, it is not surprising to identify economies in which exchange rate movements fuel business cycle volatility. We assess whether the Czech economy belongs to this group. We analyze the relations between the exchange rate and other macroeconomic variables within the VAR framework using the sign restriction technique as proposed by Uhlig (2005). The results of variance decomposition of the exchange rate do not allow us to reject a shock-absorbing role of the exchange rate for the Czech economy. To assess the robustness of the results, we also examined the relation between monetary policy and exchange rate volatility. We conclude that the shock-absorbing nature of the exchange rate prevails over shock generating one.

Keywords: Czech Republic, exchange rates, sign restrictions, structural vector autoregression

JEL Classification: C32, E32, F31, F4

Suggested Citation

Audzei, Volha and Brázdik, František, Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber (September 2012). Czech National Bank, Working Paper Series, 2012-09. Available at SSRN: https://ssrn.com/abstract=2274685 or http://dx.doi.org/10.2139/ssrn.2274685

Volha Audzei

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

František Brázdik (Contact Author)

Czech National Bank ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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