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CNB > Economic research > Research publications > Research and Policy Notes > 2014 > The Exchange Rate as an Instrument at Zero Interest Rates: The Case of the Czech Republic

The Exchange Rate as an Instrument at Zero Interest Rates: The Case of the Czech Republic

Michal Franta, Tomáš Holub, Petr Král, Ivana Kubicová, Kateřina Šmídková, Bořek Vašíček

This study examines the use of the exchange rate by the Czech National Bank as a monetary policy instrument at the zero lower bound on interest rates. It provides a review of the economic literature on unconventional monetary policy instruments and particularly on the possibility of using the exchange rate. It explains the CNB’s reasons for further easing monetary policy and for choosing the exchange rate instrument and its specific level, and discusses its expected benefits in the case of the Czech Republic. It also explains why the CNB ultimately decided to transparently declare a one-sided exchange rate commitment with potentially unlimited foreign exchange interventions. The article concludes by assessing the impacts of the exchange rate weakening on the Czech economy to date, as compared to what the CNB had expected, and by describing the public debate of the CNB’s action and related changes in its communication strategy.

JEL codes: E31, E37, E58, F31

Keywords: Asymmetric exchange rate commitment, deflation, exchange rate, foreign exchange interventions, inflation expectations, monetary policy, unconventional instruments, zero lower bound

Issued: September 2014

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