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Presentation on the paper written by T. Holub
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Content Introduction
Theoretical background
Historical background
Management of the Exchange rate
Conclusion
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Introduction
Not an exhaustive econometric analysis
Aim of the paper:
what is current approach to managing exchange rate float
Helpful for further research
Contribution to international literature
Lessons for the future ERM II regime
Only direct interventions discussed
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Theoretical Background
Exchange rate pegs popular in the past stabilisation
strategy for many transition countries
Currency crises in the 90s need for a change of ER regime
bipolar view on pegs either hard peg or none at all
More countries switched to floating, currency board,
monetary union
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Theoretical Background
3 options to create nominal anchor (flexible ER)
just-do-it policy without explicit nominal anchor
Money targeting strategy
Inflation targeting (most used)
Challenges of ER interventions:
Lack of apparent effectiveness
Impact on the credibility of monetary policy framework
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Historical background
Current monetary policy regime in CZ:
Inflation targeting + managed floating (since 1997)
Until then fixed ER
Managed due to restrictive policy measures
Mid 90s situation deteriorated
1997 Asian crisis -> pressure on ER to devaluate -> CZK
depreciated by 10%
Switched to inflation targeting to create new nominal anchor
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Historical background
Starting conditions for the Czech inflation targeting:
1st transition country to adopt it
developed as disinflation strategy
due to openness of Czech economy CZ more
vulnerable to exogenous and ER shocks
Czech inflation targeting evolved in time
well developed, modern monetary policy regime
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ER Developments and policy responses
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Management of the Exchange rate
CNB announced managed floating
Occasionally intervened directly in the FE market
Mostly purchasing of foreign currency to slow down ER
appreciation
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Management of the Exchange rate
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Effectiveness of ER management
In some cases visible immediate impact on ER
occasionally it might last up to 2 or 3 months
No particular optimal intervention strategy
Something can work in one situation, but mayhave had little
effect in another one
Even successful interventions not able to prevent
relatively prolonged periods of exchange rate overvaluation
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Effectiveness of ER management
Econometric methods for estimating the effects of ER
interventions:
Answering 3 questions: immediate impact?
Medium-term impact?
Impact on volatility of the ER?
ER equation + reaction function of the Central Bank
GARCH model of ER
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Consistency of Interventions with inflation
targeting
Target consistency
Regime consistency Procedural consistency
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Conclusion
Not much advice in the literature usually recommending purefloating
No clear answer for the effectiveness of interventions
CZ managed floating ER with the euro Two waves of appreciation in 1998 and 2001
Interventions mostly against appreciation
Suggested policy conclusions:
Larger as well as smaller economies better of with freely floating,
rare interventions
Avoid interventions in case of conflict with inflation targets
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