What is the equilibrium exchange rate of the Czech koruna?
| Thesis title in Czech: | What is the equilibrium exchange rate of the Czech koruna? |
|---|---|
| Thesis title in English: | What is the equilibrium exchange rate of the Czech koruna? |
| Key words: | FEER, BEER, směnný kurz, česká koruna, rovnováha, intervence, Česká Národní Banka |
| English key words: | FEER, BEER, exchange rate, Czech crown, equilibrium, intervention, Czech National Bank |
| Academic year of topic announcement: | 2015/2016 |
| Thesis type: | diploma thesis |
| Thesis language: | angličtina |
| Department: | Institute of Economic Studies (23-IES) |
| Supervisor: | PhDr. Jaromír Baxa, Ph.D. |
| Author: | hidden - assigned by the advisor |
| Date of registration: | 17.05.2016 |
| Date of assignment: | 17.05.2016 |
| Date and time of defence: | 21.06.2017 08:30 |
| Venue of defence: | Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105 |
| Date of electronic submission: | 16.05.2017 |
| Date of proceeded defence: | 21.06.2017 |
| Opponents: | Ing. Vilém Semerák, M.A., Ph.D. |
| URKUND check: | |
| Guidelines |
| The Czech National Bank (CNB) is defending Czech koruna ́s exchange rate through exchange rate commitment on rate 27 CZK/EUR from November 2013. The
economy flourishes with GDP growth among the highest in Europe in 2015. Also, European Central Bank (ECB) is using Quantitative easing (QE) to weaken euro and persuade inflation in Eurozone. Therefore, the exchange rate of Czech koruna to euro is near 27 CZK/EUR from November 2015 until now. There is growing pressure on the CNB regarding the end of the interventions, with forecasted growing inflation rate, which should meet the inflation target in the following months. In the economical field, there is small number of analyses on the Czech currency and its equilibrium, even in this turbulent time of interventions. There is even smaller number of analyses, which are evaluating the effect of the interventions and Forward rates on the equilibrium exchange rate. These effects of these variables among the other can be interesting for the policy implication perspectives. The CNB is using interventions to defend the floor exchange rate to euro and doesn ́t want to release its intervention regime, at least for now. Is Czech koruna undervalued or overvalued? Where is the equilibrium exchange rate of Czech koruna? What is the role of the Interventions made by CNB? These will be main questions answered in this diploma thesis. |
| References |
| BABETSKI, Jan and ÉGERT, Balázs, 2005. Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech Beer?. DOI: 10.2139/ssrn.770405. ISBN 10.2139/ssrn.770405. Available at: http://www.ssrn.com/abstract=770405
2. CLARK, Peter B. and MACDONALD, Ronald, 1998. Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEERs. IMF Working Paper, Vol., pp. 1-38. Available at: http://ssrn.com/abstract=882342 3. ENGEL, Charles, 2014. Exchange Rates and Interest Parity. 453. DOI: 10.1016/B978-0-444-54314-1.00008-2. Available at: http://linkinghub.elsevier.com/retrieve/pii/B9780444543141000082 4. KOMÁREK, Luboš and MOTL, Martin, 2012. Behaviorální a fundamentální rovnovážný měnový kurz české koruny, Politická ekonomie, University of Economics, Prague, vol. 2012(2), pp. 147-166. Available at: http://www.vse.cz/polek/download.php?jnl=polek&pdf=835.pdf 5. LEVY-YEYATI, Eduardo, Federico STURZENEGGER a Pablo Alfredo GLUZMANN. Fear of appreciation. Journal of Development Economics. 2013, 101, 233-247. DOI: 10.1016/j.jdeveco.2012.11.008. ISSN 03043878. Available at: http://linkinghub.elsevier.com/retrieve/pii/S0304387812001022 6. POŠTA, Vít, 2010. Estimation of the Behavioral Equilibrium Real Exchange Rate of the Czech Koruna. Trends Economics and Management, 4(7), pp.48-56. Available at: https://trends.fbm.vutbr.cz/index.php/trends/article/view/135 |
| Preliminary scope of work |
| Expected Contribution:
I will conduct Behavioral Equilibrium and Fundamental Equilibrium exchange rate models, which will show the present exchange rate equilibrium in the economy. I will make comparison of presented models of Czech koruna over time. The contribution will be in presentation of these five models, without any bias to current state of the equilibrium exchange rate. The combined model can be taken as some sort of benchmark, in what range would be Czech koruna, when the currency will be freely floating. The results can be used in future modelling of Czech economy and could be used as range, where will approximately exchange rate of Czech koruna go after the end of the interventions set by CNB. I will extend the analysis for the Interventions as short and long-term variable in the behavioral models. I will show the effect of the forward rates in the economy as forecasting factor for the equilibrium. Furthermore, I will compare presented results of the models with results presented by CNB and other institutes which presented research on this topic. |
| Preliminary scope of work in English |
| 1. Question #1: Is Czech koruna undervalued or overvalued in comparison to situation where is Czech koruna market driven?
2. Question #2: Where is the equilibrium exchange rate of Czech koruna at the end of 2016? 3. Question #3: What is the performance of presented models in comparison with previous research? 4. Question #4: What is the role regarding the equilibrium of the Interventions made and Foreign exchange reserves held by the Czech National Bank? 5. Question #5: Is there any effect of the past forward rates on the equilibrium exchange rate? Methodology The Fundamental Equilibrium Exchange Rate (FEER) is the real exchange rate which produces a current account that is exactly matched by equilibrium medium-term capital flows and therefore is consistent with macroeconomic balance. (Clark et al., 1998). I will conduct FEER model according to the Clark et al. (1998) with vector error- correction (VEC) method. The second FEER model will be conducted according to the Komárek et al. (2012) again with VEC method. Behavioral Equilibrium exchange rate model will be illustrated by model of real effective exchange rate and with equations with Euro. I will build BEER models according Clark et al. (1998) with VEC method, next Babetski et al. (2005) with autoregressive distributed lag (ARDL) model and finally according Pošta (2010) with VAR method. In the next part of my thesis I will conduct extended analysis on the effect of the currency interventions, according to the Dynamic ordinary least squares (DOLS), according Levy – Yeyati et. al. (2013) The data will be obtained mostly from Czech statistical office, system ARAD of ČNB and from statistical offices of European union and European Central Bank (ECB). Introduction Literature review Data and Methodology Results a. Behavioral Equilibrium models b. Fundamental Equilibrium models c. Extended Behavioral Equilibrium models Concluding remarks |