Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/203185 
Authors: 
Year of Publication: 
2018
Series/Report no.: 
IES Working Paper No. 06/2018
Publisher: 
Charles University in Prague, Institute of Economic Studies (IES), Prague
Abstract: 
In recent years, central banks in the Czech Republic and Switzerland used exchange rate floor commitment to use unlimited FX interventions to keep the exchange rate above the declared floor rate to persistently devalue their currency and stimulate inflation. Central banks in other small open economies, such as Sweden and Israel, faced similar challenges and could have chosen this instrument as well. In this paper, I develop an extension to dynamic stochastic general equilibrium (DSGE) models that could be used to esimate impact of such devaluations with exchange rate floor. As an illustration, I apply the extension to models estimated for Sweden and the Czech Republic. In particular, I simulate impact of a 5 percent devaluation with the exchange rate floor used as an unconventional monetary policy instrument with interest rates at the zero lower bound. In the first year after the devaluation, the annual consumer price in inflation increases by 0.8 percent in Sweden and 1.8 percent in the Czech Republic. The long-term exchange rate pass-through to consumer prices is 40 percent and 65 percent, respectively. The increase in inflation is highly dependent on the persistent nature of the devaluation.
Subjects: 
Exchange Rate Floor
Devaluation of Currency
Unconventional Monetary Policy Instrument
Dynamic Stochastic General Equilibrium Models
Exchange Rate Pass-Through
JEL: 
E31
E37
E58
F41
Document Type: 
Working Paper

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