Real-Time Time-Varying Equilibrium Interest Rates: Evidence on the Czech Republic

This paper examines (real-time) equilibrium interest rates in the Czech Republic in 2001:1- 2005:12 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply structural time-varying coefficient model with endogenous regressors to evaluate fluctuations of equilibrium interest rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the equilibrium interest rates gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium and successful disinflation in the Czech economy.http://deepblue.lib.umich.edu/bitstream/2027.42/57228/1/wp848 .pd

Financial Accelerator Effects in the Balance Sheets of Czech Firms

The paper examines a financial accelerator mechanism in analyzing determinants of corporate interest rates. Using a panel of the financial statements of 448 Czech firms from 1996-2002, we find that balance sheet indicators matter for the interest rates paid by firms. Market access is particularly important in this regard. The strength of corporate balance sheets seem to vary with firm size. There is also evidence that monetary policy has a stronger effect on smaller than on larger firms. On the other hand, we find no asymmetry in the monetary policy effects over the business cycle.http://deepblue.lib.umich.edu/bitstream/2027.42/57227/1/wp847 .pd

Estimating Time-Varying Policy Neutral Rate in Real Time

This paper examines policy neutral rate in real time for the Czech Republic in 2001:1-2006:09 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply a structural timevarying parameter model with endogenous regressors to evaluate the fluctuations of policy neutral rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the policy neutral rate gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium, equilibrium exchange rate appreciation as well as successful disinflation in the Czech economy.policy neutral rate; Taylor rule; time-varying parameter model with endogenous regressors

The Determinants of the Interest Rate Margins of Czech Banks

The author examines the determinants of the interest rate margins of Czech banks by employing a bank-level dataset at quarterly frequency in 2000–2006. His main results are as follows. He finds that more efficient banks exhibit lower margins and there is no evidence that banks with lower margins compensate themselves with higher fees. Price stability contributes to lower margins. Higher capital adequacy is associated with lower margins, contributing to banking stability. Overall, the results indicate that the determinants of the interest rate margins of Czech banks are largely similar to those reported in other studies for developed countries.commercial banks, interest rate margins, bank efficiency

Real Equilibrium Exchange Rate Estimates: To What Extent Are They Applicable for Setting the Central Parity?

The objective of this paper is twofold. First, we provide an introduction on estimation and methodology of the real equilibrium exchange rate. Second, we discuss to what extent are these estimates applicable for setting the central parity. Given the uncertainty surrounding the estimates, they are informative in the sign rather than the size of the misalignment of exchange rate, but may serve as useful consistency checks for the decision about setting the central parity. We argue that policy makers shall consider the estimates in their decisionmaking only if the real exchange rate is substantially misaligned (i.e. more than 10% as a rule of thumb).equilibrium exchange rate; monetary policy; ERM II

Financial Accelerator Effects in the Balance Sheets of Czech Firms

The paper examines a financial accelerator mechanism in analyzing determinants of corporate interest rates. Using a panel of the financial statements of 448 Czech firms from 1996–2002, we find that balance sheet indicators matter for the interest rates paid by firms. Market access is particularly important in this regard. The strength of corporate balance sheets seem to vary with firm size. There is also evidence that monetary policy has a stronger effect on smaller than on larger firms. On the other hand, we find no asymmetry in the monetary policy effects over the business cycle.balance sheet channel, financial accelerator, interest rates, monetary policy transmission

Is Dollarization the Right Option? Financial Fragility, Original Sin and Fear of Floating

This paper focuses on the option of dollarization or euroization for emerging-market economies. There are no “one-size-fits-all” exchange-rate policies for emerging- -market economies; however, there are macroeconomic disadvantages associated with flexible exchange-rate regimes in such economies. Similarly, the timing of euro adoption in EU accession countries is a complex matter as well. The paper compares the costs and benefits of euro adoption, in particular to unilateral euroization.dollarization, euroization, exchange-rate regimes, emerging-market economies

Undershooting of the Inflation Target in the Czech Republic: The Role of Inflation Expectations

This article addresses the role of the inflation target in inflation expectations using the vector error correction (VECM) and block restriction vector autoregression (VAR) models, based on the monthly data of 1999–2007 in the Czech Republic. The econometric analysis identifies nothing to support the “hypercredible” inflation target hypothesis, under which a 1 pp decrease in the inflation target would be accompanied by a decrease in inflation expectations of more than 1 pp. The results, however, do suggest that the inflation target is a major determinant of inflation expectations, its importance for the formation of inflation expectations surpassing even that of current inflation. Another conclusion is that inflation expectations decrease significantly in response to stricter monetary policy and to a lower inflation target. All in all, the results imply that Czech monetary policy has anchored inflation expectations.monetary policy, inflation targeting, undershooting

Interest Margins Determinants of Czech Banks

We examine the determinants of interest rate margins of Czech banks employing bank-level dataset at the quarterly frequency in 2000-2006. Our main results are as follows. We find that more efficient banks exhibit lower margins and there is no evidence that the banks with lower margins would compensate themselves with higher fees. Price stability contributes to lower margins. There are some economies of scale, as larger banks tend to charge lower margins. Higher capital adequacy is associated with lower margins contributing to the banking stability. Overall, the results indicate that the determinants of interest rate margins of Czech banks are largely similar to those reported in other studies for developed countries.commercial banks, interest rate margins, bank efficiency

Financial Accelerator Effects in the Balance Sheets of Czech Firms

In this paper we examine a financial accelerator hypothesis analyzing the determinants of firm-level interest rates. Using a panel of the financial statements of 448 Czech firms in 1996- 2002, we find that firm’s balance sheet indicators are important determinant for the firm-level interest rates. Indebtness and market access matter in particular. The strength of balance sheets is procyclical. There is also evidence that monetary policy has stronger effects on small firms and during a period of the excess demand for credit (but not during a downturn).Monetary policy transmission; interest rates; balance sheet channel; financial accelerator