The Costs of Czech and Swiss Exchange Rate Commitments
As central banks in advanced countries are currently considering launching a new wave of the unconventional monetary policies that were introduced in the aftermath of the Global Financial Crisis of 2008-2009 (GFC), an assessment of impacts of these policies has become major point of interest of numerous empirical studies. This paper aims to investigate the impacts of one such policy, which is often overlooked in academic literature – managed depreciation followed by the introduction of one-sided exchange rate commitment enforced by foreign currency interventions. This policy was introduced by the central banks of the Czech Republic and Switzerland. The accumulation of FX reserves arising due to managed depreciations has also led to fears about the associated balance sheet risks, as this policy may be very costly. Indeed, as a result of their large foreign currency holdings, both the Czech and Swiss National Banks at some points did post significant losses. Therefore, the aim of this paper is to estimate the overall costs of FX interventions of the Czech and Swiss National Banks. We find that for the Czech Republic the overall costs since 2011 were slightly less than 5 % of GDP, while for Switzerland the overall cumulative costs were significantly negative – indicating a profit for the Swiss central bank. Finally, we perform a simple empirical exercise to gauge, whether the costs associated with FX interventions affect negatively the central bank credibility and thus could possibly affect the transmission of monetary policy. Using the FMOLS estimator, our results seem to indicate that the costs of FX interventions did not adversely affect the credibility of the two central banks.
E50, E58, F31, G15
managed depreciation, one-sided exchange rate commitment, costs of foreign exchange interventions, FMOLS estimator, central bank credibility