Foreign exchange interventions and interest rate policy in the Czech Republic: Hand in glove?

This paper studies the impact of daily official FX interventions on the Czech koruna's exchange rate vis-à-vis the euro (the German mark) from 1997 to 2002. Both the event study methodology extended with official interest rate moves and a variety of GARCH models reveal that FX interventions, especially koruna purchases, were relatively ineffective from 1997 to mid-1998. From mid-1998 to 2002, however, koruna sales turned out to be effective in smoothing the path of the exchange rate for up to 60 days. Nevertheless, the event study approach also indicates that the success of FX interventions depends crucially on the coordination of intervention and interest rate policies.