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Current CNB Research Projects

The list of current CNB projects divided according to the four main areas of research is available below.

Monetary Policy

Macroeconomic Modelling

Financial Stability

Real Sector and Fiscal Policy



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Monetary Policy

A1/12 Demand for Money Holdings by Households in the Czech Republic
Eva Hromádková, Ivana Kubicová, Branislav Saxa

In this project, we propose to estimate and interpret a model for the money demand of households in the Czech Republic. We will apply the findings of the current research by introducing variables related to the wealth of households, as well as the uncertainty they face both on financial and labor markets, to the standard set of determinants. Using the VECM framework, we will identify both long-term relationship as well as short-term dynamics underlying the households’ money demand and we will comment on the stability of these estimates over the time. Finally, we would assess the effectiveness of the new model for the purposes of the monetary analysis and forecasting framework of Czech National Bank.

A2/12 Sources of Asymmetric Shocks: Exchange Rate or Other Culprits?
Michal Skořepa, Luboš Komárek

Based on a sample of some 20 currencies (including Czech koruna) of advanced as well as emerging economies, implying about 200 currency pairs, we relate bilateral nominal exchange rate pressures for each currency pair in the period 1999-2008 to a list of OCA indicators such as mutual structural dissimilarity or labour market parameters. These indicators gauge the room for asymmetric shocks in a given pair of economies and thus for “fundamental” pressures on changes in the bilateral nominal exchange rate. The part of actual pressures that cannot be accounted for in this way is a measure of exchange rate pressures generated by the nominal exchange rate itself.

A3/11 Explaining the Evolution of Money Market Spread in the Czech Republic
Adam Geršl, Jitka Lešanovská

We will explore the main components of the risk premium on the interbank market in the Czech Republic using bank-level data of PRIBOR-setting banks. We suggest that there are three main components of the premium: liquidity risk, credit (counterparty) risk and corporate-loan-related return premia. Especially the last factor based on the hypothesis that the quotes of the reference banks may also be influenced by banks’ incentive to increase the return on corporate loans that are usually linked to PRIBOR rates has never been tested empirically. The model could be used for forecasting and policy analysis.

A5/11 Determinants of Level and Structure of the Foreign Exchange Reserves
Luboš Komárek, Jan Frait, Michal Hlaváček, Soňa Benecká

Project will deal with theoretical and empirical dimension of the determinants of level and structure of the foreign exchange reserves (FXR). The empirical analysis will include cross-country comparison of the various relative measures of the FXR, the panel data and cointegration analysis. The dependent variable will be the FXR in USD, explanatory variables will consist of the FDI, openness, domestic credit, GDP, costs of holding FXR, dummy variable for the exchange rate regime and other. The estimations will be made for four periods: early nineties, late nineties, the new millennium (2000-2007) and financial crisis.

A1/10 The Impact of Monetary Policy on Financing of Czech Firms
Dana Hájková, Ivana Kubicová, Hanna Pryvalava, Ruslan Aliyev

The paper analyzes the aspects of the broad credit channel of MP transmission in the Czech Republic from the side of firm financing decisions. The first part documents the level and trends in firm indebtedness, explores the structure of financing and describes heterogeneity among firms. The second part formalizes the relationship between firm financing decisions and its determinants including firm-specific parameters and effects of MP. The strengths of the bank-lending, balance-sheet and relationship-lending channels will thus be assessed. By split sample analysis we will analyze the effects of the recent financial crisis on the functioning of the respective channels. In addition, MP indicator will capture the known relevant conditions for firm financing in the Czech Republic including the emerging wedge between MP rates and interbank rates, which as a result influenced client interest rates.

A2/09 Demand for Cash in a Converging Economy
Jan Cimburek, Michal Hlaváček, Štěpán Radkovský, Lenka Misíková

The paper will describe the environment of cash circulation and cash usage in the Czech Republic (history, users, consumer preferences, changes in consumer behaviour, cash logistics and technology, converging environment, etc.) and determine the main factors of cash demand in the medium and long term. Thorough research of available papers, foreign best practices and different approaches and models of other central banks and researchers will be presented. Using the available data (denominated structure of cash in circulation, macro/micro indicators) the paper will focus on the modelling of cash demand in the Czech Republic and propose a customised empirical model with respect to the converging environment and local specifics, including the discussion of possible institutional factors leading to structural breaks.

A2/07 Adaptive Learning of Monetary Policy in Two-Sector Economies: Stability and Estimation
Sergey Slobodyan, Yulia Rychalovskaya

Constant gain adaptive learning has been shown to better fit median professional inflation forecasts and out-of-sample inflation rates than other methods. Recent literature on the estimation of DSGE models of monetary policy when economic agents are assumed to use a constant gain adaptive learning rule has shown a strong role for adaptive learning in generating persistence of major macroeconomic time series and de-emphasised real rigidities. We propose to check this result for the euro area and the USA, closely following Lubik and Schorfheide (2005). We would perform a Bayesian estimation of a two-sector open economy model with a Taylor-type monetary policy rule and constant gain adaptive learning.

A5/07 Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber
Volha Audzei, František Brázdik

This project aims to study the determinants of exchange rate volatility in a structural vector autoregression (SVAR) framework for the Czech Republic. We will analyse the relative importance of different shocks in explaining exchange rate volatility, focusing on the role of both nominal shocks (monetary policy and exchange rate shocks) and real shocks (demand and supply). The identification strategy builds on sign restrictions, challenging the long- and short-run restrictions and recursive identification. Moreover, our monetary policy shock identification strategy accounts for endogenous and anticipated movements in interest rates. Exchange rate shocks are viewed as movements in the exchange rate which are not explained by fundamentals. If these shocks are important in explaining exchange rate fluctuations, the exchange rate should be considered as a shock generator rather than a shock absorber.

Macroeconomic Modelling

B1/11 Developing the Czech National Bank’s Integrated Monetary and Macro-prudential Policy Framework
Michal Franta, Jaromír Beneš, Michal Hlaváček

The aims of the paper are to develop a framework for examining the effects of newly considered macroprudential policies on the financial and real sectors in the Czech economy, and discuss the roles and interactions of monetary, macroprudential, and microprudential policies in promoting economic stability. We build a simple DSGE model with banking sector, and parameterise it to fit the relevant characteristics of the Czech economy. We use the model to simulate policy experiments introducing new dynamic macroprudential capital and liquidity requirements, quantify their implications for the economy, and propose metrics to evaluate optimality of such policies.

B3/11 Macroprudential Policies in Small Open Economies: Specifics, Effectiveness, Limits
Alexis Derviz, Jakub Seidler

We will formally introduce a macroprudential instrument in a small open economy model with a financial sector and a foreign financing channel, and calibrate it to the properties of the Czech financial sector characterized by a significant foreign parent backing. We shall then simulate internationally asynchronous business cycles in order to establish (a) effectiveness of macroprudential policies in suppressing domestic credit bubbles under a relatively easy foreign financing (reflecting e.g. an economic downturn in important partner economies); (b) overall impact of the macroprudential policy on economic activity in different phases of the business cycle in an open economy.

B5/11 DSGE Model with Housing Market
Michal Zděnek, Peter Molnár, Miroslav Hloušek, Jaromír Tonner

The purpose of this paper is to analyze the relationship between housing market and aggregate fluctuations in a small open economy framework. We construct simple dynamic general equilibrium model with standard frictions. Following loosely Davis and Heathcote (2005) and Iacoviello and Neri (2010) we add sectoral heterogeneity and explicitly incorporate housing market. We use this framework to study housing investment and price dynamics over business cycle and its consequences for macroeconomic activity. Further we investigate housing market sensitivity to monetary and real disturbances. We estimate the model, using Bayesian methods, for selected European economies (including Czech Republic).

B7/11 Changes in Inflation Dynamics in New EU Member States
Bořek Vašíček, Jaromír Baxa, Miroslav Plašil

The project studies inflation dynamics in the Czech Republic and other NMS employing New Keynesian Phillips Curve model. First, we aim to identify short-term inflation factors, considering external effects, output gap and various measures of marginal cost . Second, we evaluate relative importance and backward- and forward-looking inflation component. Third, we assess the evolution of inflation process using time-varying coefficient and regime switching models. Fourth, we compare forecasts from our model with those generated by classical and Bayesian VARs. Finally, we perform a cross-country comparative analysis to identify how the monetary policy regime affects the inflation process.

B1/10 A Two-Country DSGE Model
Michal Andrle, Jan Brůha

The goal of the project is to build a two-country DSGE model of a converging economy, capturing jointly long-run converging trajectories with business-cycle fluctuations. This approach will combine the expertise of the Brůha-Podpiera two-country model with that of the g3 model. The Brůha-Podpiera model is a long-run perfect-foresight model, while the g3 model is the state-of-art tool for assessment of cyclical position, historical decomposition, and forecasting. The consistent combination of these frameworks is expected to provide (i) an independent assessment of the monetary policy conditions, and (ii) an alternative forecast of Euro Area macroaggregates relevant for the Czech Economy.

B2/10 Developing a Small Open DSGE Model with a Financial Sector
Jiří Polanský, Jaromír Tonner, Osvald Vašíček, Jakub Ryšánek

We will develop a small open economy DSGE model for the Czech Republic with the explicit incorporation of financial sector. The model will be tailor-made with respect to Czech stylized facts. We will introduce financial intermediaries into the framework. The financial sector block will be derived according to Edwards and Vegh (1997) and Benes et al. (2009). We will estimate the real part of the model with Bayesian techniques. Suggested model will be able to capture important linkages between real and monetary variables in the Czech economy, explore the role of commercial banks within the business cycle and analyze a propagation of structural shocks.

B4/09 Forecasting Based on a Variety of Econometric Methods
Jakub Matějů, Marek Rusnák

The goal of the project is to produce forecasts of core macro variables based on a variety of econometric methods, to pool the forecasts to get a final composite forecast and to provide an evaluation of the forecasts used within the CNB. We aim to use real time data available at a particular point in the past. A forecast is made by fitting a model to the data up to that point and using the model to make projections. Forecasting performance, based on forecasting error evaluation, is also expected to be evaluated. The outcome of the project should enrich the current forecasting methods within the CNB and subject the forecasts to an international comparison.

B5/09 Macro-finance Modelling for the Czech Republic
Miroslav Kollár, Kamil Kladívko, Jiří Škop

The proposed research project attempts to apply simple macro-finance models (i.e. joint models of the term structure of interest rates and the macroeconomy) to Czech data. We will begin with an affine model of the term structure of interest rates as a benchmark model. Afterwards, we will use both the no-arbitrage framework and econometric framework of the term structure models to estimate a few macro-finance models on Czech data. The no-arbitrage models will include a noarbitrage macro-finance model in a vector autoregression and a no-arbitrage macro-finance model with standard Neo-Keynesian macroeconomic relationships. The econometric model will be the Nelson-Siegel macro-finance model in a vector autoregression.

Financial Stability

C1/12 Testing for Non-Linear Feedback Effects between the Banking Sector and Real Economy
Tomáš Konečný, Oxana Babecká-Kucharčuková

The project will focus on the empirical link between the banking sector and real economy. Using the Czech Republic as an example of a country with a rapidly developing banking system, it will complement the existing evidence on developed market economies. A flexible ‘latent interactive variable system’ (Muellbauer and Williams 2011) will be employed to account for institutional shifts in bank credit markets and possible non-linearities in the feedback link. Finally, unlike most of the existing evidence, the study will explore several dimensions including default rates, credit growth rates, provisioning rates, and shares of non-performing loans for individual segments.

C2/12 Bank Liquidity Creation in the Czech Republic
Jakub Seidler, Roman Horváth, Laurent Weill

The aim of the project is to measure liquidity creation by Czech banks over the last decade. We will then be able to analyze the volume and the evolution of liquidity creation of the Czech banking industry. We will check whether the financial crisis has contributed to diminish liquidity creation as well as to investigate which bank characteristics influence liquidity creation. The link between banks capital and liquidity creation will be closely analyzed which brings additional information regarding possible outcomes of the new regulatory framework Basel III on the Czech banking sector’s liquidity creation.

C4/12 A Regime-Dependent Components Analysis of the Sovereign CDS/Bond Term Premium in CEEC
Bořek Vašíček, Giovanni Calice, RongHui Miao, Filip Štěrba

The study investigates the dynamic behavior of the sovereign CDS/bond term premium in CEE countries through time using a Markov Switching Unobserved Component model. The univariate time series are decomposed to permanent and stationary components. This enables to understand the evolution of the sovereign term premia and its link to observed macroeconomic and financial information. In addition, by conducting a regime dependent factor analysis, we get valuable insights into how the fundamental and volatility components of the sovereign term premia are determined by daily observed monetary policy, exchange rate and stock market variables in structurally different time periods.

C5/12 Measuring Financial Spillover in Europe
Bořek Vašíček, Peter Claeys

We use daily data on financial market prices of sovereign bonds and other assets to analyze financial contagion across EU bond markets, with emphasis on the CR and the CEE region. Following Diebold and Yilmaz (2009, 2011), the measure is based on the forecast variance decomposition of shocks to asset market returns and their volatility. The two resulting indices measure the spillover between bond markets, and the degree of exposure to macroeconomic and financial shocks, including action of rating agencies. Since the index is time-varying it can be used to study both tranquil periods and crisis episodes. Preliminary findings point to periods of strongly increasing spillover across markets especially at the start of the Financial Crisis and in recent months.

C6/12 Investment, Financial Constraints, and Bankruptcy: Evidence from Ten Years of Czech Economic Development
Martin Pospíšil, Jiří Schwarz

Studying investment behaviour and financial constraints is key to understanding the economic development of a country and consequently the monetary transmission mechanism. The last ten years allow for a microeconomic analysis of investment behaviour of Czech companies over a longer business cycle. I use both standard (investment-cash flow sensitivities) as well as non-standard (switching regression) methodology to test for the evolution of credit constraints. The work is to contribute to the empirical literature on investment and transmission mechanism as it should be able to capture not yet analysed structural changes in economic development. The model can also provide some empirical evidence on the relationship between firms (borrowers) and banks (lenders) relevant for models with financial frictions.

C1/11 Stress Testing the Household Sector Using Micro Data
Petr Jakubík, Kamil Galuščák, Petr Hlaváč

Using individual-level data, we will develop methods of stress testing the household sector by simulating households’ financial distress under various macroeconomic scenarios. Parameters such as exposure at default and loss given default will be used to test the households’ vulnerability to changes in unemployment and household income, interest rates and asset prices. As a proxy for financial distress we will use household surplus, i.e. the income left after minimum day-to-day expenditures, non-interest housing and loan installments paid.

C2/11 Models for Stress Testing in the Insurance Sector
Zlatuše Komárková, Marcela Gronychová

The project is focused on top-down stress testing for Czech insurance sector. The aim is (i) to improve the currently used methodology under Solvency I regime and enlarge it by some insurance risks, and (ii) to create a dynamic stress test. Shocks intended to apply would replicate a macroeconomic scenario and their impact is intended to be in both asset and liability side of the balance sheet. Identification of issues of transition from the methodology used under Solvency I regime to applicable under Solvency II should be one of outcomes of the project as well.

C4/11 Identification and Interconnections of Asset Price Bubbles on Financial Market
Luboš Komárek, Michal Hlaváček, Narcisa Kadlčáková, Zlatuše Komárková

This project aims at identifying the best procedures for monitoring and early identification of asset price bubbles at foreign exchange, housing, stock exchange and credit markets. We will compare available spectrum of tools (mainly trends, statistical filters, relative indicators; empirical methods and specification tests). We will also highlight the identification problems of the asset price bubbles related to determining the fundamental value of an asset, accounting for market and country specifics. Furthermore the project plans to asses the interlinkages of the bubbles both across different financial market segments and cross border.

C5/11 Macroprudential Policy and Its Instruments in a Small EU Economy
Jan Frait, Zlatuše Komárková, Helena Sůvová

The purpose of the project is to assess from a policy perspective various measures that are discussed within the category of macroprudential policies. Our prime focus will be the set of the built-in instruments for reducing pro-cyclicality of the financial system, preventing the accumulation of systemic risk, and creating the buffers for coping with the adverse shocks. We will try to assess whether the individual measures may have the capacity to influence the behaviour of financial system in a pre-emptive way or just prepare the institutions for bad times via building sufficient buffers in good times.

C6/11 Contagion Risk in the Czech Financial System: Network Analysis and Macroprudential Instruments
Ivana Kubicová, Václav Hausenblas, Jitka Lešanovská, Amadeo Alentorn

We aim at applying the network analysis method to the network of exposures among banks in the Czech Republic including exposures to relevant foreign counterparties, such as parent companies abroad. We will simulate different domino effects and attempt to quantify the impact of a failure of individual domestic banks or groups of banks and also foreign parents. The project will further simulate an application of a possible macroprudential instruments (of a built-in nature such as a capital buffer) to address the problem of “too interconnected to fail”.

C1/10 Dynamic Stress Testing of the Czech Banking System
Adam Geršl, Petr Jakubík, Tomáš Konečný, Zlatuše Komárková, Jakub Seidler

The aim of the project is to build an advanced framework for scenario stress testing which would feature (a) dynamic (quarterly) modelling of bank's balance sheet items and income, (b) longer horizon of the impact of a wide variety of shocks, (c) integration of funding liquidity risk in the macroeconomic stress tests via non-linear treshold models, (d) network interaction and second-round effects via interbank contagion, fire-sales of assets and stigma effects, (e) pro-cyclical Basel II risk weights, (f) a first approximation of the feedback loop between the macroeconomy and the banking sector.

C3/10 Financial Crisis and Interest Rate Spreads
Michal Hlaváček, Christa Hainz, Roman Horváth

We use dynamic panel data models to examine the determinants of interest rate spreads of Czech banks with a focus on the behaviour of spreads during the current financial crisis. As compared to existing literature that makes use of yearly accounting data, we employ a much richer bank supervisory dataset that allows us to study the spread for different loan categories or borrower types on a monthly/quarterly basis. We evaluate whether there are any changes in mechanism determining the spread during the crisis especially those related to the swings in liquidity and credit risk as well as whether there are some differences of this reaction in between different types of banks.

C4/10 Macroeconomic Environment and Credit Loss Modeling
Jakub Seidler, Tomáš Konečný, Konstantin Belyaev, Aelita Belyaeva, Martin Vojtek

The aim of this project is to determine macroeconomic factors influencing credit losses in the banking sector. The various econometric approaches will be employed on the data for different banks segments (retail, small and medium enterprises and corporate sector) in order to identify sensitivity of their LGD parameter with respect to the state of the economy and characteristics of the debtors. The main added value will be enhanced understanding of the important parameter LGD for the Czech economy. To our best knowledge, no similar study was conducted because of data unavailability.

C5/09 Models and Stress Testing of Pension Funds
Michal Hlaváček, Jaroslav Heřmánek, Vítězslav Babický

The project would create a model of the current pension insurance system to enable us to evaluate the risks of this system using stress testing techniques and international comparisons. The project should help to quantify the basic risks both on the "investment side" of the pension system (which is currently prevailing) and on the "longevity insurance side" of pension funds. The tests of the investment side would mainly include standard market risk tests similar to those currently conducted as part of the stress testing of the banking sector. The nature of the available data (data on the individual exposures of pension funds) would allow us to do the market risk stress tests in a more precise and detailed way, including assessment of the Value at Risk. As the "longevity insurance side" of pension funds is still not being chosen by planholders, the project should model it using models of decision making by planholders and their age and demographic characteristics. In the last part of the project we plan to apply the methodology to assess the implications of the different reforms of pension funds currently under preparation.

C8/07 Residential Property Prices and Their Implications for Financial Stability
Michal Hlaváček, Luboš Komárek, Václav Beran, Dana Čápová, Zita Prostějovská

This proposal is for two basic lines of research, each ending in one working paper. In the first line of research we are planning to start with overview of the existing literature for developed countries and try to modify these approaches for the transforming country. Than we plan to conduct a simple analysis of the determinants of house prices. We plan to introduce a link of house prices in the Czech Republic to the development of wages, unemployment, real construction costs, building plot prices, demographic trends, the affordability of house loans, the development of market rents in relation to the development of interest rates, and regulated rents. In the second line of research we want to explore another potential channel through which residential property prices influence financial stability, namely the channel leading through loans to residential property developers. As those loans are often based on speculation on house price dynamics, their delinquency might offer some first signal of a bursting real estate bubble. In this line of research we want to explore a unique database of residential property developers’ projects in Prague constructed by researchers from the Construction Faculty at the Czech University of Technical Sciences.

Real Sector and Fiscal Policy

D1/12 The Impact of Income Taxes and Transfers on the Labour Supply at the Extensive Margin
Gábor Kátay, Kamil Galuščák

The paper estimates the effect of income taxation on labour supply at the extensive margin in the Czech Republic, i.e. the labour force participation using the methodology of Benczúr et al. (2011) and EU-SILC datasets 2005-2010. Labour supply effect of income taxation has been extensively investigated in the empirical literature, but most of the papers focus on the intensive margin. Unlike other studies on the extensive margin, which generally concentrate on a specific group within the population and thus limits the comparability of the results, this paper provides comparable results with previous (Hungary) and future (Poland, Slovakia and possibly others) findings.
 

D1/11 Identifying Fiscal Policy Shocks in CEE Countries
Michal Franta

The proposed research project focuses on the effects of the fiscal policy in CEE countries. It draws on the recent research on the identification of fiscal policy shocks within the VAR-based modeling framework. Moreover, it resolves the problem of the short time series on government spending and revenues available by employing Hierarchical Linear Model that formalizes the idea of similarity between CEE countries into priors centered at a common mean for the region (exchangeable prior).

D2/11 Determinants of Bidders’ Behaviour in Auctions for State Debt
Michal Břeský, Kamil Galuščák, Jan Kmenta

Using data of Czech banks and from Treasury security auctions and secondary markets, we will model determinants of dealer’s strategies on primary auctions of T-bonds at the individual level. We will analyse any changes in the mechanism determining bidding strategies before and during the financial crisis, namely those related to swings in liquidity and credit risk for various market participants. CNB’s monetary policy instruments are important indirect factors determining performance of the state debt management. The project will shed light on what is the crises’ effect on coordination of fiscal and monetary policy.

D1/10 Firm-Level Labour Demand and Labour Costs: Adjustment in Good Times and During the Crisis
Kamil Galuščák, Lubomír Lízal, Jan Babecký

We will examine changes in firms’ labour demand and labour costs in the Czech Republic, resulting in two working papers. First, we will update previous estimates of the firm-level labour demand elasticity (Basu et al., 2005) in 2000-2009. Next, we will provide first evidence on year-on-year wage bill decomposition in 2007-2009. The Czech labour market and firm behaviour changed substantially since the early stages of economic transition due to FDI inflows and EU entry. In addition, the recent economic slowdown provides a source of variation needed for getting estimates that cover not only times of growth but also economy contraction.

D2/10 A Tool for Assessing the Impact of Fiscal Measures on the Economy
Jan Babecký, Róbert Ambriško, Vilém Valenta

We intend to build a small satellite DSGE model of the Czech economy which would share features of the current Czech National Bank’s G3 model, but with more comprehensive fiscal sector. With this model we would be able to investigate the transmission of fiscal policy to the real economy. Moreover, such type of model would allow performing dynamic simulations of various structural fiscal policy reforms and thus would enrich the CNB forecasting apparatus.