THE CAUSAL IMPACT OF THE RAPID CZECH INTEREST RATE HIKE ON THE CZECH EXCHANGE RATE ASSESSED BY THE BAYESIAN STRUCTURAL TIME SERIES MODEL

Abstract

I employ a Bayesian Structural Time Series model to assess the recent interest rate hike by the Czech Central Bank and its causal impact on the koruna exchange rate. By forecasting the exchange rate time series in the absence of the intervention, we can subtract the observed values from the predicted values and estimate the causal effect. The results show that the impact was small and time-limited in one model specification and nonexistent in the second version. This implies that the Czech Central Bank possesses the ability to diverge significantly from the Eurozone benchmark interest rate, at least in the short term. It also shows that the interest rate hike will not be able to curb global inflationary pressures on the domestic price level.

Data:
Received: 6 Oct 2021
Revised: 22 Nov 2021
Accepted: 6 Dec 2021
Published: 20 Dec 2021