Foreign Exchange Interventions and Interest Rate Policy in the Czech Republic: Hand in Glove?

This paper studies the impact of daily official foreign exchange interventions on the Czech koruna's exchange rate vis-a-vis the euro (the German mark prior to 1999) from 1997 to 2002. Both the event study methodology, extended with official interest rate moves, and a variety of GARCH models reveal that central bank interventions, especially koruna purchases, seem to have been relatively ineffective from 1997 to mid-1998 compared to the size of the interventions. From mid-1998 to 2002, however, koruna sales turn out to be effective in smoothing the path of the exchange rate up to 60 days. Nevertheless, the event study approach indicates that the success of FX interventions may be intimately related to the coordination of intervention and interest rate policies.