The impact of CNB's exchange rate commitment on Czech exports

• Název práce v češtině: Dopad kurzového závazku ČNB na český export
• Název v anglickém jazyce: The impact of CNB's exchange rate commitment on Czech exports
• Klíčová slova: export, fixní směnný kurz, monetární politika, metoda syntetických kontrol
• Klíčová slova anglicky: export, fixed exchange rate, monetary policy, synthetic control method
• Akademický rok vypsání: 2016/2017
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: Mgr. Michal Paulus
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 05.06.2017
• Datum zadání: 05.06.2017
• Datum a čas obhajoby: 16.01.2019 09:00
• Místo konání obhajoby: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Datum odevzdání elektronické podoby: 01.01.2019
• Datum proběhlé obhajoby: 16.01.2019
• Oponenti: PhDr. Jaromír Baxa, Ph.D.

Seznam odborné literatury

Abadie, A., Gardeazabal, J., 2003. The economic costs of conflict: A case study of the Basque Country. The American Economic Review, 93(1), 113-132.

Abadie, A., Diamond, A., Hainmueller, J., 2010. Synthetic control methods for comparative case studies: Estimating the effect of California’s tobacco control program. Journal of the American statistical Association, 105(490), 493-505.

Anderson, J. E., Vesselovsky, M., Yotov, Y. V., 2013. Gravity, scale and exchange rates (No. w18807). National Bureau of Economic Research.

Auboin, M., Ruta, M., 2013. The relationship between exchange rates and international trade: a literature review. World Trade Review, 12(3), 577-605.

Ahmed Hannan, S., 2016. The Impact of Trade Agreements; New Approach, New Insights (No. 16/117). International Monetary Fund.

Hosny, A. S., 2012. Algeria’s trade with GAFTA countries: A synthetic control approach. Transition Studies Review, 19(1), 35-42.

Nicita, A., 2013. Exchange rates, international trade and trade policies. International Economics, 135, 47-61.

Předběžná náplň práce

Motivation:
As a reaction to the Great Recession central banks throughout the western world conducted variety of novel monetary policies aimed to stimulate the economy and avoid the deflation. The Czech National Bank started exchange rate interventions in November 2013. Its aim was achieving the stated inflation target. This thesis focuses on impact of this unconventional policy on Czech sectoral trade flows as it is crucial to fully understand its effects on both national and global economy. Despite the growing number of studies about CNB exchange rate commitment, only limited attention was given to the sectoral trade flows.

The aim of the thesis is to estimate the effect of exchange rate commitment on sectoral exports of the Czech Republic. The link between trade and exchange rate is quite well explored. Auboin and Ruta (2013) provide summary of both theoretical and empirical studies on this topic. The studies suggest exchange rate misalignment has effect on exports. On the other hand, the researchers found that impact of exchange rate volatility on trade flows is ambiguous. Additionally, the empirical evidence from Nicita (2013) suggests that volatility is of serious concern only for developing countries or cases when there is no volatility as in the case of currency union or currency peg. Because the commitment stabilizes the exchange rate, it decreases the uncertainty. Therefore, we could expect increase in trade with eurozone countries. To evaluate the impact of CNB policy, the synthetic controls method will be used. This method, which was first developed by Abadie and Gardeazabal (2003), allows for comparison of actual development of trade flows with artificial control variable constructed from observations in similar countries. The first study which employed this method for bilateral trade was by Hosny (2012), but it focused on impact of trade agreements on Algeria. Similarly, the work of Hannan (2016) focused on evaluation of trade agreements. The thesis is also related to the study of Anderson et al. (2013), who estimates the impact of exchange rate on sectoral trade flows between Canada and United States.


Hypotheses:
1. Hypothesis #1: Exchange rate commitment of CNB increased the trade flows
2. Hypothesis #2: The rise in trade flows to euro area will be higher than with other countries
3. Hypothesis #3: The impact of interventions varies across the sectors


Methodology:
The data for bilateral trade flows will be obtained from the UN Comtrade database. To test the hypotheses stated above, I will employ the synthetic controls method developed in Abadie et al. (2010). This allows the comparison between actual Czech trade flows after the CNB exchange rate commitment and theoretical trade flows in absence of the commitment. To identify the potential determinants that influence trade flows, I will follow the Hosny (2012), who uses the variables from gravity model as covariates. As gravity literature puts more weight on theoretical foundations, we should only include variables that are consistent with the theory.


Expected Contribution:
The main goal of the thesis is to empirically evaluate the impact of CNB interventions on sectoral trade in the Czech republic. As there is limited amount of studies focused on this topic, it could provide additional evidence to policymakers. Moreover, the use of synthetic controls method in trade literature was limited and focused mainly on impact of trade agreement. Thus, the thesis will explore further possibilites of this method and shows how it compares with the frequently used ones, such as gravity models. Additionally, it expands literature studying the effect of exchange rates on trade with the case study of Czech Republic during exchange rate commitment period and gives evidence how much the reduction of volatility and currency misalignment matters.


Outline:
1. Introduction
2. Literature review: I will survey the literature about impact of exchanges rate on trade and synthetic controls method literature.
3. Overview of Czech exports: I will provide overview of Czech sectoral exports
4. Data: I will describe how the data were obtained and provide their descriptive statistics
5. Model: I will describe the synthetic controls method and related tests
6. Results: This section will summarize the model results and provides the falsification test to confirm the robustness of results
7. Conclusion