Evaluating the effectiveness of the Czech national bank’s monetary policy: a longitudinal study since 1997
DOI: https://doi.org/10.3846/bmee.2025.22165Abstract
Purpose – This study examines the effectiveness of the Czech National Bank’s (CNB hereafter) monetary policy with a focus on its adaptive responses to macroeconomic indicators such as inflation, unemployment, economic growth, interbank rate, imports, exports, and exchange rates. The two-week repo rate served as the primary instrument for the analysis period from January 1997 to July 2023.
Research methodology – The research employs a Vector Autoregression (VAR) model, complemented by Impulse Response Functions (IRF), Forecast Error Variance Decomposition (FEVD), Granger Causality and Johansen Cointegration Tests to analyse quarterly data on the dynamic interactions between the CNB’s two-week repo rate and key economic indicators.
Findings – The research results show that the CNB monetary policies have mainly been effective in managing inflation targeting and sustaining economic stability. The considerable influence achieved through proactive policy adjustments to unemployment and interbank rates.
Research limitations – External macroeconomic shocks not accounted for in the VAR model might influence the study results. Furthermore, the findings are specific exclusively to the Czech economy and may not be directly applicable to other countries with distinct economic structures or monetary policy frameworks.
Practical implications – The research highlights the importance of predicting repo rate adjustments in response to changes in unemployment and interbank rates. CNB could use these findings to improve the understanding of policy changes and increase their effectiveness.
Originality/Value – The findings offer valuable insights for policymakers, governments, and banking industry participants seeking to enhance monetary policy efficiency.
Keywords:
Czech National Bank, monetary policy, inflation targeting, two-week repo rate, VAR modelingHow to Cite
Share
License
Copyright (c) 2025 The Author(s). Published by Vilnius Gediminas Technical University.
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Adil, M. H., Hatekar, N. R., & Ghosh, T. (2021). The role of money in the monetary policy: A new Keynesian and new monetarist perspective. In W. A. Barnett & B. S. Sergi (Eds.), Environmental, social, and governance perspectives on economic development in Asia: Vol. 29A. International Symposia in Economic Theory and Econometrics (pp. 37–67). Emerald Publishing. https://doi.org/10.1108/S1571-03862021000029A018
Aliu, F., Kučera, J., & J., Horák, J. (2024). Exchange rate instabilities during the Russia-Ukraine war: Evidence from V4 countries. Heliyon, 10(3), Article e25476. https://doi.org/10.1016/j.heliyon.2024.e25476
Aloy, M., & Dufrénot, G. (2015). A comparison of the Fed’s and ECB’s strategies during the subprime crisis. In Monetary policy in the context of the financial crisis: New challenges and lessons: Vol. 24. International Symposia in Economic Theory and Econometrics (pp. 419–449). Emerald Publishing. https://doi.org/10.1108/S1571-038620150000024024
Amaral, A., Dyhoum, T. E., Abdou, H. A., & Aljohani, H. M. (2022). Modeling the relationship between monetary policy and GDP in the USA using statistical methods. Mathematics, 10(21), Article 4137. https://doi.org/10.3390/math10214137
Andrieș, A. M., Căpraru, B., Ihnatov, I., & Tiwari, A. K. (2017). The relationship between exchange rates and interest rates in a small open emerging economy: The case of Romania. Economic Modelling, 67, 261–274. https://doi.org/10.1016/j.econmod.2016.12.025
Arifi, D., Xhixha, H., & Aliu, F. (2023). Testing Okun’s Law: Evidence from the Western Balkan countries. SAGE Open, 13(4). https://doi.org/10.1177/21582440231208332
Barattieri, A., Cacciatore, M., & Ghironi, F. (2021). Protectionism and the business cycle. Journal of International Economics, 129, Article 103417. https://doi.org/10.1016/j.jinteco.2020.103417
Benigno, P., Canofari, P., Di Bartolomeo, G., & Messori, M. (2023). The ECB’s new inflation target from a short- and long-term perspective. Journal of Policy Modeling, 45(2), 286–304. https://doi.org/10.1016/j.jpolmod.2023.03.004
Bernanke, B. S., & Mishkin, F. S. (1997). Inflation targeting: A new framework for monetary policy? Journal of Economic Perspectives, 11(2), 97–116. https://doi.org/10.1257/jep.11.2.97
Born, A., Jahan, S., & Gemayel, E. R. (2011). What can low-income countries expect from adoption inflation targeting? IMF Working Papers, (276). https://doi.org/10.5089/9781463925932.001
Cacciatore, M., & Ghironi, F. (2021). Trade, unemployment, and monetary policy. Journal of International Economics, 132, Article 103488. https://doi.org/10.1016/j.jinteco.2021.103488
Cao, J., Dinger, V., Gómez, T., Gric, Z., Hodula, M., Jara, A., Juelsrud, R., Liaudinskas, K., Malovaná, S., & Terajima, Y. (2023). Monetary policy spillover to small open economies: Is the transmission different under low interest rates? Journal of Financial Stability, 65, Article 101116. https://doi.org/10.1016/j.jfs.2023.101116
Campos, N. F., Coricelli, F., & Moretti, L. (2019). Institutional integration and economic growth in Europe. Journal of Monetary Economics, 103, 88–104. https://doi.org/10.1016/j.jmoneco.2018.08.001
Challe, E. (2020). Uninsured unemployment risk and optimal monetary policy in a zero-liquidity economy. American Economic Journal: Macroeconomics, 12(2), 241–283. https://doi.org/10.1257/mac.20180207
Czech National Bank. (n.d.). The Czech National Bank past and present. Retrieved July 4, 2024, from https://www.cnb.cz/en/about_cnb/publications/the-czech-national-bank-past-and-present/
Cho, S. (2020). Natural interest rate, potential GDP growth rate, and long-term monetary policy stance. Journal of Economic Theory and Econometrics, 31(2), 40–69.
Eichenbaum, M. S., Johannsen, B. K., & Rebelo, S. T. (2021). Monetary policy and the predictability of nominal exchange rates. Review of Economic Studies, 88(1), 192–228. https://doi.org/10.1093/restud/rdaa024
Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276. https://doi.org/10.2307/1913236
Fawaz, F., & Rahnamamoghadam, M. (2024). A refinement of the relationship between central bank independence, inflation, and income inequality in developing countries. Journal of Central Banking Theory and Practice, 13(1), 117–131. https://doi.org/10.2478/jcbtp-2024-0006
Fidrmuc, J., & Horváth, R. (2008) Volatility of exchange rates in selected new EU members: Evidence from daily data. Economic Systems, 32(1), 103–118. https://doi.org/10.1016/j.ecosys.2007.09.004
Goodfriend, M. (2007). How the world achieved consensus on monetary policy. Journal of Economic Perspectives, 21(4), 47–68. https://doi.org/10.1257/jep.21.4.47
Grabowski, W., & Stawasz-Grabowska, E. (2021). How have the European central bank’s monetary policies been affecting financial markets in CEE-3 countries? Eurasian Economic Review, 11, 43–83. https://doi.org/10.1007/s40822-020-00160-3
Güler, A. (2021). Does monetary policy credibility help in anchoring inflation expectations? Evidence from six inflation targeting emerging economies. Journal of Central Banking Theory and Practice, 10(1), 93–111. https://doi.org/10.2478/jcbtp-2021-0005
Guo, M., & Lim, E.-S. (2024). Does inflation targeting matter for price stability? International Review of Economics and Finance, 91, 1015–1032. https://doi.org/10.1016/j.iref.2024.01.035
Gürkaynak, R. S., Kara, A. H., Kısacıkoğlu, B., & Lee, S. S. (2021). Monetary policy surprises and exchange rate behavior. Journal of International Economics, 130, Article 103443. https://doi.org/10.1016/j.jinteco.2021.103443
Islam, M. S., Hossain, M. E., Chakrobortty, S., & Ema, N. S. (2022). Does the monetary policy have any short-run and long-run effect on economic growth? A developing and a developed country perspective. Asian Journal of Economics and Banking, 6(1), 26–49. https://doi.org/10.1108/AJEB-02-2021-0014
Islam, T. U., & Ahmed, D. (2023). Inflation targeting: A time-frequency causal investigation. PLoS ONE, 18(12), Article e0295453. https://doi.org/10.1371/journal.pone.0295453
Kočenda, E., & Valachy, J. (2006). Exchange rate volatility and regime change: A Visegrad comparison.Journal of Comparative Economics, 34(4), 727–753. https://doi.org/10.1016/j.jce.2006.07.003
Krušković, B. D. (2022). Central Bank intervention in the inflation targeting. Journal of Central Banking Theory and Practice, 11(1), 67–85. https://doi.org/10.2478/jcbtp-2022-0003
Nasir, M. A., Ahmad, M., Ahmad, F., & Wu, J. (2015). Financial and economic stability as ‘two sides of a coin’: Non-crisis regime evidence from the UK based on VECM. Journal of Financial Economic Policy, 7(4), 327–353. https://doi.org/10.1108/JFEP-01-2015-0006
Nasir, M. A., Duc Huynh, T. L., & Vo, X. V. (2020). Exchange rate pass-through & management of inflation expectations in a small open inflation targeting economy. International Review of Economics and Finance, 69, 178–188. https://doi.org/10.1016/j.iref.2020.04.010
Siklos, P. L. (2010). Meeting Maastricht: Nominal convergence of the new member states toward EMU. Economic Modelling, 27(2), 507–515. https://doi.org/10.1016/j.econmod.2009.11.003
Šimáková, J. (2024). The role of exchange rate in contemporary Czechia’s foreign trade. In D. Stavárek & M. Tvrdoň (Eds.), Modeling economic growth in contemporary Czechia (pp. 51–69). Emerald Publishing. https://doi.org/10.1108/978-1-83753-840-920241004
Soukiazis, E., & Castro, V. (2005). How the Maastricht criteria and the stability and growth pact affected real convergence in the European Union: A panel data analysis. Journal of Policy Modeling, 27(3), 385–399. https://doi.org/10.1016/j.jpolmod.2005.01.002
Szkorupová, Z., Krkošková, R., & Szarowská, I. (2024). Nominal and real convergence of Czechia with the euro area. In D. Stavárek & M. Tvrdoň (Eds.), Modeling economic growth in contemporary Czechia (pp. 17–34). Emerald Publishing. https://doi.org/10.1108/978-1-83753-840-920241002
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195–214. https://doi.org/10.1016/0167-2231(93)90009-L
Wang, G., & Hausken, K. (2023). Modeling which factors impact interest rates. Journal of Central Banking Theory and Practice, 12(2), 211–237. https://doi.org/10.2478/jcbtp-2023-0020
World Bank. (n.d.). World Bank Open Data. Retrieved July 8, 2024, from https://data.worldbank.org/
Yakubovskiy, S., Alekseievska, H., & Tsevukh, J. (2020). Impact of the European Central Bank monetary policy on the financial indicators of the eastern European countries. Journal Global Policy and Governance, 9(1), 37–49. https://doi.org/10.14666/2194-7759-9-1-003
Zuniga, M. C., & Senbet, D. (2023). Does the effectiveness of monetary policy depend on the choice of policy instrument? Empirical evidence from South Korea. Journal of Central Banking Theory and Practice, 12(2), 239–265. https://doi.org/10.2478/jcbtp-2023-0021
View article in other formats
CrossMark check
Published
Issue
Section
Copyright
Copyright (c) 2025 The Author(s). Published by Vilnius Gediminas Technical University.
License
This work is licensed under a Creative Commons Attribution 4.0 International License.