F31 - Foreign ExchangeReturn

Exchange rate expectations are a crucial element in the main monetary models. Therefore, this paper analyses the mechanism behind their formation. To achieve this, we analyse traditional expectation models using data from the Survey of Professional Forecasters (SPF) for the CZK/EUR currency pair. The data used cover one-year expectations in the period from January 2001 to December 2022, which are provided monthly by the Czech National Bank (CNB). The paper demonstrates the poor performance of the perfect expectation model. Furthermore, it demonstrates that traditional models, such as static, extrapolative, regressive and adaptive expectations, exhibit some explanatory power but lack robustness. The only traditional model that exhibits robustness is the model based on the UIP puzzle, which also outperforms all other traditional models when evaluated using error metrics. Based on these observations, the paper introduces a non-traditional model in which agents simply shift the current spot value by a constant into the future. This model displays robustness and outperforms the others.

The main purpose of this paper is to investigate the long-term effects of money supply, economic growth, interest rate, exchange rate, domestic credits and the oil price on inflation in Haiti, Sudan, Türkiye and Zambia, which are among the world’s highest-inflation countries according to 2021 data. For this purpose, a panel cointegration approach is applied where fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) techniques are employed to explore the long-term effects with the help of annual data for the period 2000–2019. Also, the Dumitrescu and Hurlin panel causality test is used to determine whether there is a causality from these variables to inflation. The empirical findings show that there is a long-term relationship among these variables for the whole panel. The consequences from the FMOLS and DOLS estimates show that (i) money supply has a positive effect on inflation, (ii) economic growth affects inflation positively, (iii) an in-crease in the exchange rate causes inflation to rise, (iv) the oil price affects inflation positively, (v) interest rate affects inflation negatively, and (vi) domestic credits have a negative effect on inflation. In this context, we find that the exchange rate is the variable that has the greatest effect on inflation. Moreover, the findings of the panel causality test suggest that there is a causal relationshipfrom money supply, economic growth, exchange rate and the oil price to inflation.

We construct a simple model of exchange rates stemming from the methodology of behavioural equilibrium exchange rate (BEER) models on annual panel data for 34 countries with a floating exchange rate regime during the period 2000-2020. The basic building block of the model is the absolute version of purchasing power parity theory (the ratio of domestic and foreign price levels), further extended by other variables rooted in economic theory. A complementary interpretation of our approach could be a measurement of exchange rate deviations from purchasing power parity caused by variation in economic fundamentals. The results suggest that purchasing power parity is an appropriate reference point for exchange rate models. Furthermore, national currencies tend to be stronger against the euro with higher GDP per capita, interest rates, investment freedom, urbanization rate and terms of trade, and with lower inflation. The presented deviations of exchange rates from the model equilibrium are significantly lower than those implied by a naïve model based on purchasing power parity alone.

This paper deals with the absolute version of purchasing power parity and its applicability in transition economies. The aim of the paper is to identify and quantify deviations between nominal exchange rates and rates based on purchasing power parity. The paper specifies and analyses the theoretical causes of those deviations and focuses on the impact of prices of non-tradable goods on purchasing power parity. Parity exchange rates based on prices of tradable-only goods are then calculated for 20 transition economies. Panel regression instruments are used to analyse the influence of selected macroeconomic and institutional variables on deviations between nominal exchange rates and rates based on purchasing power parity.

This paper focuses on impact of central bank's oral commentaries on asset prices, i.e. verbal interventions. The paper maps basic preconditions and key channel how central bank's words mirror into asset prices. A significant part of the paper concentrates on the Czech Republic where the exchange rate floor and accompanying frequent comments from the CNB's Bank Board are in operation since 2013. The first hypothesis tests whether there is asset price-making information during the Bank Board decision days. In this sense, the factor analysis confirms at least two factors which influence various asset prices. It is assumed that former factor concerns the surprise in monetary policy decision and the latter following press conference. The second hypothesis endeavours to specify the components of verbal interventions: position in the Bank Board, verbal intervention form and visibility of intervention topic. Only comments made by the CNB's governor proved to be significant, leading to higher volatility of the exchange rate.

The paper is discussing CNB FX intervention and its impact on all segments of Czech financial markets from process and volumes of transactions point of view and possible consequences. The focus is on foreign exchange, bond and stock market. Although the impact of FX intervention was evident on all markets under discussion, it was not so significant having macroeconomic effects. The only exception is the FX market. The Czech National Bank contributed to the widening gap between market and equilibrium exchange rate. The undervalued Czech currency will have a temporal positive impact on the macroeconomic external balance.

The models from the GARCH family are often estimated by maximum likelihood method, either parametrically or non-parametrically. Since the parametric estimation procedure is based on an a priori distribution, its misspecification can lead to the inconsistency of the estimators. Therefore non-parametric approach, in which both model's parameters and the distribution of error terms are estimated from the data, seems to be a better alternative. In our work, we propose a non-parametric technique with the use of a heuristic called differential evolution to estimate the parameters of a GARCH-M model. This technique can more likely reach to a global solution of maximum likelihood estimation (MLE) task. Further, it can also more effectively control the required properties of the estimates. The suitability of our approach is verified on modeling the CZK/USD and CZK/EURO forward exchange rate premium of period from 2007 to 2012 by a GARCH-M model.

The paper discusses the phenomenon of long-term real equilibrium appreciation of the koruna in the context of economic, i.e. nominal and real convergence. The real appreciation can take place either through a nominal exchange rate channel or through inflation differential channel vis-á-vis the reference country, or through a combination of those two channels. However, the choice of monetary policy regime predetermines the occurrence and intensity of those channels. Subsequently, the paper summarizes the sources of equilibrium real appreciation, i.e. Balassa-Samuelson effect, the effect of terms of trade, FDI inflows, the impact of changes in the structure of domestic consumption and the effect of state administrative prices. It also presents range of models which are applicable for estimation of equilibrium (real) exchange rate. Finally, the paper presents and discusses trajectory of equilibrium real appreciation resulting from models of the CNB (QPM, g3 and others).

The exchange rate cannot significantly diverge from a (real) long-term equilibrium level consistent with the macroeconomic picture of an economy for a long period of time; otherwise, the economy suffers from macroeconomic imbalances such as below-potential growth and below natural employment, or on the other hand faces overheating of the economy with rising inflation. The paper focuses on different methods of how to measure the long-term equilibrium exchange rate. After a brief discussion of different approaches, the NATREX one was theoretically developed for the case of an open economy and empirically validated for the Czech economy. The NATREX concept represents a macroeconomic model based on stock-flow interaction. After the estimation of the NATREX model for the CZK, we have been able to answer such questions as: What are the pace and main determinants of the current long-term equilibrium appreciation? What is the current value of the equilibrium exchange rate and the misalignment of the current exchange rate? And, how fast is the exchange rate likely to revert to its equilibrium value?

The article discusses problems of the empirical verification of the relative version of the theory of purchasing power parity based on aggregated price indexes (especially using the consumer price index). The goal of the articles is to compare empirical results obtained from cross-country time series analysis using cointegration analysis, Error Correction Model, as well as VAR analysis. The authors tested 21 currency pairs of the U.S.A., Canada, Japan, Switzerland, the Great Britain, Norway, and Sweden in the period between 1975 and 2007. All tested time series were cointegrated of the first order with the exception of the consumer price index of Switzerland, which was cointegrated of the second order. The results of cointegration analysis are not very robust. This is explained by the authors as follows: existence of high transaction costs in an arbitrage, existence of complementary goods and oligopoly structure of exports, and expected back reaction between exchange rate and inflation.

The article aims at introducing new methodology for recognizing suitable indicators to monitor the potential risk of extensive pressure on the exchange rate (early warning indicators) and for identifying vulnerabilities in an economy to this pressure reflected by simultaneous negative development of the observed early warning indicators. The construction of the empirical model is based on the combination of the signal approach and the binary model of behaviour. This model focuses on both strong and increased pressure on exchange rate and the parameters are adjusted to the Czech environment. The results indicate that the most significant early warning indicator for the Czech economy is the gap between current account deficit and foreign direct investment and further M2 to foreign exchange ratio, GDP growth and export growth. In total the model identified correctly 72 per cent periods of increased vulnerability of the Czech economy to excessive devaluation pressure. At the same time it identified correctly 78 per cent of tranquil periods. This methodology constitutes an innovative approach, which needs a further verification.

Czech economy has recently accelerated the real economic convergence to the European average. Nevertheless, in terms of price convergence the Czech economy is still lagging behind the expected dynamics, which should theoretically respond to the pace of relative economic growth. This asymmetry may (as one of many other factors) contribute to some difficulties in stabilizing Czech inflation during the two-years transition period before accession to the Euro-zone, when price convergence criterion and exchange rate stability criterion should be simultaneously met. The paper points out selected issues of the Czech nominal convergence dynamics and emphasizes possible negative impacts of restrictive monetary policy measures (pushing for low inflation rate and stable exchange rate vis-à-vis euro) on the real growth of the Czech economy. In this respect, the paper tries to find some lessons from Slovenian and Greek approach for the arrangement of the Czech monetary policy in the pre-accession period.

The paper analyses a relationship between monetary aggregate M2 and inflation in a small open economy. The relationship between monetary expansion and inflation as well as a dynamic of income velocity of money framework in a small open economy are discussed in more details in the paper. Authors have developed a medium-term structural model using for an empirical verification of the relationship between monetary aggregate M2 and price development in tradable and non-tradable goods and services in the Czech Republic in the period 1996-2004. The empirical results of the model indicate that money has a significant impact on the price development of non-tradables. On the other hand, a statistically significant relationship between money and tradables inflation in the case of the Czech small open economy is not found. The conclusions presented in the paper suggest that the monetary aggregate should not be ignored in practical policy-making.

The paper presents a dynamic approach to the theory of uncovered interest rate parity. It is examined the dynamic relation between the actual change in spot exchange rate and interest rate differential. Authors show the hypothesis of uncovered interest rate parity is based on an ex ante view and that is the reason that the expected change in spot exchange rate cannot be replaced by an ex post approach. The dynamic approach developed in the paper is empirically tested for five transitive countries of Central and Eastern Europe. The model is estimated using both VAR and cointegration analyses. The model of error correction is also included in the empirical verification of the model.

The large financial crises in the last decade have increased the interest of many economists in searching for some indicators, which can predict speculative attacks on currencies. Most of these studies concern on emerging economies, because they are more vulnerable to such speculative attacks. This paper points out main methodological issues of two standard approaches to the construction of the early warning system - the signal approach and the regression probit or logit model approach. Based on avoiding these issues alternative approaches have been evolved. Three of them - two regimes model, VAR model and Markov-switching model - are described in the next part of this paper. The comparison of predictive power shows the importance of the construction of country specific early warning systems.

The article arrives to the following conclusions. First, the optimal currency area theory cannot deliver critical (objective) values of tests, whose passing would guarantee that costs of adoption of euro would be lower than the benefits. Second, several empirical observations strongly support the hypothesis that early adoption of euro by the Czech Republic would not incur any substantial losses. Third, several recent studies focused on testing the synchronisation of Czech business cycle vis-à-vis Eurozone do apply analytical techniques inappropriately, which implies biased results. Fourth, the Czech economy has enough experience with excessively volatile exchange rate. The greatest advantage of adoption of euro will consist in a replacement of exchange rate fluctuations and substantially higher stability of inflation. In quantitative terms, the weight of accession countries in Eurozone will be too small to influence the overall inflation and thus co-determine the European Central Bank monetary policy.