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From Peg to Float: Exchange Market Pressure and Monetary Policy in the Czech Republic
Author(s) -
Kemme David M.,
Lyakir Gennady
Publication year - 2011
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2010.00934.x
Subject(s) - economics , czech , float (project management) , monetary policy , interest rate , monetary economics , exchange rate , inflation (cosmology) , granger causality , vector autoregression , macroeconomics , international economics , econometrics , philosophy , linguistics , physics , management , theoretical physics
Abstract Exchange market pressure (EMP) in the Czech Republic is calculated for 1995–2006, when the Czech National Bank transitioned to inflation targeting (IT). EMP is a useful indicator of incipient foreign exchange market pressures, a signal of the need for policy adjustments and a clear delineator of monetary policy regime change. VAR estimates clearly identify quite different policy responses during the two regimes. During 1995–98, interest rate and domestic credit responses to EMP were statistically significant and in accord with traditional theory, i.e. domestic credit creation and interest rates were managed to maintain the exchange rate target as if policymakers were explicitly responding to changes in EMP. During the 1998–2006 IT regime there is a link between domestic credit creation and EMP, with no interest rate effects. Exchange market interventions were incidental and supportive of IT goals. Impulse response functions mirror the VAR and Granger causality results.