Impact of the CNB's exchange rate commitment: pass-through to inflation

Since 7 November 2013, the Czech National Bank has kept the exchange rate of the Czech koruna above 27 korunas per euro. As the key monetary policy interest rate had already fallen to zero, an exchange rate commitment or “floor” was introduced with the aim of preventing deflation in the Czech economy and restoring inflation to its target rate. This note presents a simplified analysis of the pass-through of the CNB’s exchange rate commitment to inflation and of why the subsequent turnouts of actual inflation need not have matched the CNB’s initial expectation. We will not, however, attempt to evaluate the appropriateness of the decision to make the commitment or of the specific exchange rate chosen by the CNB for its floor; such an evaluation would require a detailed comparison between the information and forecasts that the CNB had available in late 2013 and later actual developments.Full publication: Inflation Mechanisms, Expectations and Monetary Policy