Journal of Advances in Economics and Finance

Download PDF (422.8 KB) PP. 29 - 37 Pub. Date: February 1, 2019

DOI: 10.22606/jaef.2019.41004

• Arshad Hayat^1,2 and Philip Katz^{1
  1}Department of International Business, Metropolitan University Prague
  ²IES, FSV Charles University Prague

The main aim of this paper was to estimate the exchange rate pass-through into import prices and the overall inflation rate in the Czech Republic in the light of the Czech National Bank exchange rate intervention policy. We used monthly data from 2000-2017 and used Markov Switching model, as developed by Hamilton (1989), in an attempt to capture the non-linear relationship of the exchange rate-pass through in different regimes of exchange rate intervention vs no intervention in the exchange rate by the CNB. The paper found the presence of two states in the economy and further found that although the exchange rate (ECzk/Eur) does not have a significant effect during state 1, the effect becomes significant in state 2 where the pass-through rate into Czech import prices is 42%. This pass-through did not follow into the overall inflation rate. Furthermore, we estimated an 86% probability of staying in state 2 when the economy is in state 2. This means that the Czech economy will spend considerably more time in state 2 where the pass-through into import prices is 42%.

Exchange rate pass through, Markov switching model, inflation rate

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