THE IMPACT OF THE ZERO LOWER BOUNDED FOREIGN INTEREST RATES ON A SMALL OPEN ECONOMY
| Authors | |
|---|---|
| Year of publication | 2016 |
| Type | Article in Proceedings |
| Conference | 3rd International Multidisciplinary Scientific Conference on Social Sciences and Arts, SGEM 2016 |
| MU Faculty or unit | |
| Citation | |
| Field | Economy |
| Keywords | Zero Lower Bound; foreign capital flows; exchange rate interventions; DSGE models with constraints |
| Description | In the paper we analyze the small open economy widely influenced by the foreign economy with bounded interest rates. We analyze the foreign interest rates pass through into a small open economy and impact of the Zero Lower Bound. To evaluate this impact in a real economy we used a dynamic stochastic model of general equilibrium of a small open economy estimated on Czech and European data series. The constraint on the foreign interest rates is modelled using new computational tool DynareOBC designed and created by Tom Holden. In the second part of our analysis we deal with the foreign capital flows that are implied by the interest rate differential. Czech National Bank uses a nominal exchange rate as an unconventional monetary policy instrument. Stable level of exchange rate may attract foreign investors and that generates pressure on appreciation of the FX rate and the central bank must intervene. This effect may be even stronger when some European central banks decided to decrease policy rates below zero. |
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