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

31 Pages Posted: 16 Oct 2017

Date Written: September 2017


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.

Keywords: Foreign exchange, Czech Republic, Europe, Foreign exchange intervention, Central banks and their policies, exchange rate, synthetic control method

JEL Classification: F31, E58

Suggested Citation

Caselli, Francesca, Did the Exchange Rate Floor Prevent Deflation in the Czech Republic? (September 2017). IMF Working Paper No. 17/206, Available at SSRN: https://ssrn.com/abstract=3053202

Francesca Caselli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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