Abstract
We analyze the contribution of the real exchange rate to the macroeconomic volatility of Czech economy and its role in cushioning economic disturbances. Results from a two-country structural VAR model do not allow us to reject a shock-absorbing role of the real exchange rate for the Czech economy.
This result is robust to model extensions. Further analysis shows that domestic monetary policy and the real exchange rate are responsive to asymmetric and real exchange rate shocks in the short term, while the contribution of non-policy shocks is prevailing in the long term.
This supports the view that the Czech National Bank's policy is predictable. Low transmission of a real exchange rate shock to output and price volatility is consistent with the theoretical role of the exchange rate as a shock absorber.