Modelling of an asymmetric foreign exchange rate commitment in the Czech economy. DSGE model with constraints.
|Year of publication||2016|
|Type||Article in Proceedings|
|Conference||34th International Conference Mathematical Methods in Economics 2016 Conference Proceedings|
|MU Faculty or unit|
|Keywords||Zero Lower Bound; unconventional monetary policy; constraints in DSGE models|
|Description||In this paper we analyse the use of the foreign exchange rate as an instrument of monetary easing. The asymmetric commitment used by the Czech National Bank is modelled as a constraint in a DSGE model. The model we used for our analysis is based on the concept of Justiniano, Preston (2010) and we redesigned it to use nominal exchange rate in a uncovered interest parity (UIP) condition. We estimated the model using a set of the Czech and Euro area data series and then performed a simulation using the method and tools proposed and developed in Holden (2016). Our aim was to show the impact of a long-term use of asymmetric exchange rate commitment into the economy. To answer this question we analyse the simulated trajectories of an endogenous variables that represent the development of economy. In the first part we described the model structure and we compared the different specifications of UIP condition we used for the analysis. Then we provided a brief characteristic of a method we used to implement constraints into a DSGE model. The final section provides discussion of the obtained results.|