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Estimating the Effective Lower Bound for the Czech National Bank's Policy Rate
Název práce v češtině: Estimating the Effective Lower Bound for the Czech National Bank's Policy Rate
Název v anglickém jazyce: Estimating the Effective Lower Bound for the Czech National Bank's Policy Rate
Akademický rok vypsání: 2015/2016
Typ práce: diplomová práce
Jazyk práce: angličtina
Ústav: Institut ekonomických studií (23-IES)
Vedoucí / školitel: prof. doc. PhDr. Tomáš Havránek, Ph.D.
Řešitel: skrytý - zadáno vedoucím/školitelem
Datum přihlášení: 31.05.2016
Datum zadání: 31.05.2016
Datum a čas obhajoby: 13.09.2017 08:30
Místo konání obhajoby: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
Datum odevzdání elektronické podoby:28.07.2017
Datum proběhlé obhajoby: 13.09.2017
Oponenti: prof. Ing. Oldřich Dědek, CSc.
Kontrola URKUND:
Seznam odborné literatury
Agarwal, R. & Kimball, M., 2015. Breaking Through the Zero Lower Bound. IMF Working
Papers 15/224.

Alsterlind, J., Armelius, H., Forsman, D., Jonsson, B. & Wretman, A., 2015. How Far
Can the Repo Rate Be Cut?. Economic Commentary 11/2015, Sveriges Riksbank.

Andersen, M., Kristoffersen, M. & Risbjerg, L., 2015. The money market at pressure on
the Danish krone and negative interest rates. Danmarks Nationalbank, Monetary Review,
4th Quarter.

Bank of Japan, 2016. Introduction of Quantitative and Qualitative Monetary Easing with
a Negative Interest Rate. Announcement, 29.1.2016. www.boj.or.jp/en/announcements/ release

Bean, C., 2013. Note on Negative Interest Rates for Treasury Committee. Bank of England.

Bech, M. & Malkhozov, A., 2016. How have central banks implemented negative policy
rates? BIS Quarterly Review, March 2016.

Beer, Ch. & Birchler, U., 2015. Cash without future? Future without cash? A wider
view. SUERF Policy Note No. 3, December 2015.

Buiter, W., 2015. It's Time to Remove the Lower Bound on Interest Rates and Here?s
the How-To. Presentation given at the 'Removing the Zero Lower Bound on Interests
Rates' Conference, London on May 18, 2015.

Coeure, B., 2015. How binding is the zero lower bound?. Presentation given at the 'Removing
the Zero Lower Bound on Interests Rates' Conference, London on May 18, 2015.

Cohen-Setton, J., 2015. The below-zero lower bound. Bruegel blog post, March 9, 2015.

Jackson, H., 2015. The International Experience with Negative Policy Rates. Discussion
Paper 15/13, Bank of Canada.

Johannsen, B. K. & Mertens, E., 2016. The Expected Real Interest Rate in the Long
Run: Time Series Evidence with the Effective Lower Bound. FEDS Notes, 2016(1703).

Keohane, D., 2015. Negative Rates and Gesell Taxes: How Low Are We Talking Here?.
FT Alphaville, 2.2.2015. ftalphaville.ft.com/2015/02/02/2103032/negative-rates-and-ge-sell-taxeshow-

Kimball, M., 2015. Negative Interest Rate Policy as Conventional Monetary Policy. National
Institute Economic Review 234(1), 5-14.

Melin, M., 2016. Negative Interest Rates Could Go As Low As 4.5%: JPMorgan Shocker.
Value Walk, February 10, 2016. www.valuewalk.com/2016/02/jpmorgan-negative-interest-rates/.

Rognlie, M., 2015. What Lower Bound? Monetary Policy with Negative Interest Rates.
Job Market Paper. http://www.mit.edu/ ~ mrognlie/rognlie jmp.pdf

Schmiedel, H., Kostova, G. a Ruttenberg, W., 2012. The Social and Private Costs of Re-
tail Payment Instruments: A European Perspective. European Central Bank, Occasional
Paper Series 137.

Witmer, J. & Yang, J., 2015. Estimating Canada's Effective Lower Bound. Staff Analytical
Note 2/2015, Bank of Canada.
Předběžná náplň práce
Since 2014, four central banks in Europe and the Bank of Japan have moved their key policy rates into negative territory as one of unconventional policy measures aimed at providing monetary stimulus. Doing so they disproves the traditional view on the lower bound for nominal interest rates to be zero. In fact, the lower bound on interest rates is given by the threshold below which holding deposits on bank accounts is more expensive than holding cash. Even though the cash is often characterized as a zero-yielding asset, storing large amounts of cash is not costless and therefore the effective yield is negative, implying that the effective lower bound on interest rates is also below zero. The costs of holding cash consist of storage, transportation and insurance costs and also the loss of convenience linked with the electronic transactions and deposit holdings. To the best of my knowledge, some general estimates or estimates for other countries are available until now (e.g. Witmer & Yang, 2015). All of the above-mentioned components of the total costs may, however, vary across different economies. Therefore, the aim of this thesis is to estimate the effective lower bound (ELB) for the Czech National Bank's policy rate with respect to the specific characteristics of the Czech economy and market conditions as precisely as possible.
Besides costs of holding cash, the expected duration of negative rates is important in determining the ELB. The longer the duration of negative rates, the more probable converting into cash should be (Bean, 2013). Nevertheless, no extraordinary movements have been observed in the concerned countries. Other important point is related to potential measures preventing conversion of reserves into cash, like fees for withdrawing excessive amounts of cash, exchange rate between paper currency and electronic money (Kimball, 2015 and Agarwal & Kimball, 2015) or radical abolishing currency (Buiter, 2015), which would lead to further decreasing or removing the ELB. Last but not least, pass-through from changes in policy rates to retail interest rates (Bean, 2013) should be mentioned. All these points will also be considered in the thesis.

1. The ELB for the CNB's policy rate is below -1%.
2. Insurance costs are the most important component determining ELB.
3. Costs of loss of convenience are the most important component determining ELB.

The ELB for the CNB's policy rate will be estimated as a sum of particular components of costs of holding cash, following general estimates and, if available, estimates for other countries, adjusting it for local conditions.
Storage costs of large amounts of cash are estimated by Jackson (2015), who assigns importance to the size of bills (denominations): the higher denomination (in real terms), the lower transportation and storage costs due to lower actual physical amount. Witmer & Yang (2015) estimate storage costs (including substantial insurance costs) using storage costs for precious metals or fees for exchange-traded funds physically backed by gold or silver. The convenience of electronic transactions is estimated e.g. by Koehane (2015) - proxied by fees associated with credit and debit card interchange fees. Schmiedel et al. (2012) estimates social and private costs of cash (and other payment instruments).

Expected contribution:
In the thesis I will estimate the ELB (an interval) for the CNB's policy rate. This may have important practical policy implications, especially in the current state of world with very low or negative rates across Europe in the aftermath of financial crisis. The ELB is essential in determining the point below which a drastic move into cash would be provoked, financial sector activity be impaired (Jackson, 2015) and the impact of monetary policy would be reduced (Alsterlind et al., 2015).

1. Introduction and motivation
2. Literature review and theoretical background
2.1. Theory on the zero and effective lower bound
2.2. Empirical evidence on negative interest rates
2.3. Summary of existing estimates of ELB in the literature
3. Methods and estimation (country-specific)
4. Results: a numerical estimate (interval) of the ELB for the CNB's policy rate
5. Conclusion: a summary of findings and their implications for policy and future research

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