Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Foreign exchange market wikipedia , lookup
Bank for International Settlements wikipedia , lookup
Bretton Woods system wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
Exchange rate wikipedia , lookup
JEM027 Monetary Economics Monetary policy implementation during the crisis Tomáš Holub [email protected] November 2, 2015 Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague Basic questions ▪ How has the crisis changed MP implementation? ▪ What tools are available close to the ZLB? ▪ What were the differences among major central banks in terms of the UMP tools? ▪ Why has the CNB chosen exchange rate as its UMP instrument? JEM027 – Monetary Economics 1 Reasons for UMP tools 1 Disruptions to the MP transmission mechanism 2 Reaching the zero-lower-bound (ZLB) on nominal interest rates Two phases of the crisis: phase 1 was essentially about the reason 1 , phase 2 more about the reason 2 JEM027 – Monetary Economics 2 Disruptions to transmission CB‘s interest rate (e.g. a rate hike) ▪ MP transmission Rise of market interest rate (ST and LT) Exchange rate appreciation Lower import prices Decrease in exports, increase in imports Higher instalments and non-performing loans ratios Decrease in asset prices Stricter credit conditions Decrease in wealth ▪ Problems in the FS Savings Reduction in growth, firm consumption investments reduction ConsumpReduction in tion reducfirm tion, savings investments growth Decrease production Employment reduction, wage growth decrease Inflation decrease Exchange rate channel goes via the financial system, especially in its early stages Interest rate and credit channel thus lead to malfunctioning of transmission and/or autonomous tightening of the MP conditions Asset price channel JEM027 – Monetary Economics 3 Reaching the ZLB ▪ With very depressed demand r conditions, the equilibrium real IR may be strongly negative IS ▪ With nominal IR at the ZLB, real interest rates are given by inflation expectations ▪ If this is not sufficient easing, 0 r* (π*) economy falls deeper into recession (); inflation expectations fall, real IR goes up, etc. ▪ Solutions: reduce LT IR, Y* Y increase πe to ease further () JEM027 – Monetary Economics 4 PHASE 1 MP implementation during the crisis Phase 1: trying to keep market rates close to main policy rates, satisfy increased demand for liquidity (i.e. doing the standard job in non-standard circumstances) by: ▪ Broadening the range of counterparties and collateral ▪ Full-allotment fixed-rate tenders (ECB) ▪ Narrower corridors around the main policy rate ▪ Extending maturities of monetary operations ▪ FX swaps with other central banks, etc. JEM027 – Monetary Economics 5 PHASE 1 ECB in August 2007 ECB interest rates and the overnight interest rate Percentages per annum Source: ECB and Reuters “ August 14, 2007 – JeanClaude Trichet, President of the ECB As I indicated after the Governing Council meeting on 2 August, the ECB has paid great attention to the developments in the market. We have provided in particular the liquidity which was needed to permit an orderly functioning of the money market… JEM027 – Monetary Economics ” 6 PHASE 1 Fed in August 2007 Release date: August 10, 2007 “ The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets. The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the FOMC's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding. JEM027 – Monetary Economics ” 7 PHASE 1 ECB in October 2008 ECB interest rates and the overnight interest rate Percentages per annum ▪ Tendency of money market rates to move above the main policy rate during the crisis ▪ Effort of the ECB to avoid this ▪ Crisis intensified after the fall of Lehman Brothers Source: ECB and Reuters JEM027 – Monetary Economics 8 PHASE 1 ECB in October 2008 “ October 8, 2008 – The Governing Council of the ECB decided on the following two measures As from the operation settled on 15 October, the weekly main refinancing operations will be carried out through a fixed rate tender procedure with full allotment at the interest rate on the main refinancing operation, i.e. currently 3.75%. As of 9 October, the ECB will reduce the corridor of standing facilities from 200 basis points to 100 basis points around the interest rate on the main refinancing operation… The ECB will continue to steer liquidity towards balanced conditions in a way which is consistent with the objective to keep short term rates close to the interest rate on the main refinancing operation. JEM027 – Monetary Economics ” 9 PHASE 1 Money market risk premia JEM027 – Monetary Economics 10 PHASE 1 MP implementation during the crisis Overview of selected central banks primarily influencing the interbank market and smoothens of financing in foreign currencies Conditions of credit transactions between central bank and financial institutions Bank Extending of the eligible counterparties Broadening of eligible collateral Extension of the maturity FX swaps Fed BoE 1 ECB SNB 1 Related to EIB only Source: Central banks + Full allotment (i.e. supplying unlimited amount at the given IR) JEM027 – Monetary Economics 11 PHASE 2 MP implementation during the crisis Phase 2: adding unconventional measures (i.e. leaving the standard concept), typically close to the ZLB: ▪ Purchase of government bonds (quantitative easing – QE; US, UK, ECB only recently) ▪ Purchase of covered bonds or other private assets ▪ “Forward guidance”, i.e. commitment to keep low IRs for some period (Sweden, US, BoE, ECB) ▪ FX interventions (Israel, Chile) / exchange rate commitment (Switzerland, Czech Republic) ▪ Negative nominal rates (Switzerland, Sweden, Denmark, ECB) For more detail see: http://www.bankofengland.co.uk/education/inflation/qe/video.htm JEM027 – Monetary Economics 12 PHASE 2 CBs‘ key policy rates Key policy rates ▪ ▪ The policy rates of major central banks were cut close to the zero lower bound (ZLB) during the crisis The ECB was an exception for quite some time, but this difference was partly notional, and does not apply any more (ECB‘s deposit rate is now even negative) JEM027 – Monetary Economics 13 PHASE 2 Money market rates Money market rates ▪ In practice, money market rates fell to low levels in 2009 not just in the US, but also in the EA, where the market rates declined well below the main policy rate in the periods of surplus liquidity. ▪ Currently, EA rates are slightly negative (the deposit rate is -0.20 % p.a.). JEM027 – Monetary Economics 14 PHASE 2 Literature on the ZLB ▪ Krugman, P.R. (1998): “It's Baaack: Japan's Slump and the Return of the Liquidity Trap.” ▪ Eggertsson, G.B., Woodford, M. (2003): “The Zero Bound on Interest Rates and Optimal Monetary Policy.” ▪ Bernanke, B.S., Reinhart, V.R. (2004): “Conducting Monetary Policy at Very Low Short-Term Interest Rates.” ▪ Jung, T. a kol. (2005): “Optimal Monetary Policy at the ZeroInterest-Rate Bound.” ▪ Fujiwara, I. (2006): “Evaluating monetary policy when nominal interest rates are almost zero.” ▪ Svensson, L.E.O. (2006): “Monetary Policy and Japan’s Liquidity Trap.” ▪ Cúrdia, V., Woodford, M. (2011): “The central-bank balance sheet as an instrument of monetary policy.“ JEM027 – Monetary Economics 15 PHASE 2 MP implementation during the crisis Overview of selected central banks primarily influencing long-term interest rates and the exchange rate Outright purchases of financial assets Government bonds Bank Covered bonds Other private assets Foreign currency Fed BoE ECB SNB Enforced in 2010 by the Greek crisis (SMP: ≈ EUR 220 bn.; OMT not activated; APP since Jan 2015) Source: Central banks ABSPP launched in Oct 2014 JEM027 – Monetary Economics 16 CBs‘ balance sheet expansion CB total asset size Percent of GDP ▪ ▪ Large B-S expansion for all major central banks ECB more hesitant in the early phase + endogenous exit feature, as the banks were allowed to repay LTRO early – proved to a problem in the double dip, now being reversed by the extended APP (QE) Source: DataStream, IFS JEM027 – Monetary Economics 17 Fed‘s operations Selected assets of the Federal Reserve USD millions JEM027 – Monetary Economics 18 Eurosystem‘s operations ECB’s liquidity operations Eurosystem main liquidity-providing measures EUR billions % of the simplified balance sheet size Source: ECB JEM027 – Monetary Economics 19 ECB vs. Fed ▪ Difference not so much in the size of balance sheet expansion, but more in the timing and structure ▪ ECB more reliant on LT bank financing, quite reluctant to buy GBs massively (until recently) vs. Fed mainly buying government bonds Reasons ▪ Differences in mandate (lexicographic vs. dual) ▪ Differences in historical experience (Weimar hyperinflation vs. Great Depression) ▪ Prohibition of monetary financing for the ECB ▪ Differences in the financial system (bank-based vs. marketbased) JEM027 – Monetary Economics 20 Efficacy of the UMP tools (1/2) Total cumulative effects of bond purchases on 10-year government bonds Cumulative change (bps) Note: Some estimates for the range are derived visually from graphs; some papers study changes in bond prices over a two-day window following announcements; staff estimates consider a one-day window Source: Literature (see Appendix table 2, IMF 2013a), Bloomberg,, and IMF staff calculations http://www.imf.org/external/np/pp/eng/2013/090313.pdf JEM027 – Monetary Economics 21 Efficacy of the UMP tools (2/2) Summary of empirical studies on the macro effects of UMP 1/ To make results comparable, estimated impacts have been translated into the equivalent of a 100 bps shock to the spread Source: http://www.imf.org/external/np/pp/eng/2013/090313.pdf JEM027 – Monetary Economics 22 “Forward guidance” ▪ May be understood differently by different CB‘s – Announcing the future path of interest rates consistent with the CB‘s standard reaction function (business as usual for some central banks, but not, e.g. for the ECB) – Commitment to keep the interest rate at the ZLB for a longer time period than the CB‘s standard reaction function would suggest, with the aim of bringing down the LT nominal rates and increasing inflation expectations, thus reducing LT real rates (truly unconventional) JEM027 – Monetary Economics 23 Fed‘s forward guidance (1/3) Release date: January 25, 2012 “ … the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. ▪ i.e. Fed has also started to provide guidance on future interest rate outlook JEM027 – Monetary Economics ” 24 Fed‘s forward guidance (2/3; „the dots“) Appropriate pace of policy firming Percent JEM027 – Monetary Economics 25 Fed‘s forward guidance (3/3) Release date: December 12, 2012 “ In today’s statement, the Committee also recast its forward guidance to clarify how it expects its target for the federal funds rate to depend on future economic developments. Specifically, the Committee anticipates that exceptionally low levels for the federal funds rate are likely to be warranted “at least as long as the unemployment rate remains above 6½ percent, inflation over the period between one and two years ahead is projected to be no more than half a percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” JEM027 – Monetary Economics ” 26 ECB‘s forward guidance Release date: July 2013 “ … Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics. ▪ i.e. ECB started to use forward guidance more recently, in vaguer form, and stressing that they clarify the standard reaction function and do not deviate from it JEM027 – Monetary Economics ” 27 BoE‘s forward guidance Release date: July 2013 “ … The MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%, subject to the conditions below… The guidance linking Bank Rate and asset sales to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached ▪ In the MPC’s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target ▪ Medium-term inflation expectations no longer remain sufficiently well anchored ▪ The FPC judges that the stance of monetary policy poses a significant threat to financial stability… ▪ … but more then they moved to a broad range of indicators JEM027 – Monetary Economics ” 28 CNB‘s forward guidance Release date: September 2013 “ At the close of the meeting the Board decided unanimously to leave the two-week repo rate unchanged at 0.05%. Interest rates will remain at current levels (i.e. at technical zero) over a longer horizon until inflation pressures increase significantly. The CNB is ready to use the exchange rate if further monetary policy easing becomes necessary. The probability of launching foreign exchange interventions has not changed and remains high. JEM027 – Monetary Economics ” 29 Literature on the exchange rate tool at the ZLB ▪ McCallum, B.T. (2000): “Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates.” ▪ Svensson, L.E.O. (2001): “The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap.” ▪ Coenen, G., Wieland, V. (2003): “The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan.” ▪ Jeanne, O., Svensson, L.E.O. (2007): “Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank.” ▪ Iwata, S., Wu, S. (2012). “A Note on Foreign Exchange Interventions at Zero Interest Rate.” ▪ Beneš, J., a kol. (2013): “Exchange Rate Commitment versus Exchange Rate Interventions at the Zero Level of Interest Rates.“ JEM027 – Monetary Economics 30 Svensson (2001): ”Foolproof way“ ▪ ”Announce an upward-sloping price-level target path. ▪ Announce that the currency will be devalued and that the exchange rate will be pegged to a crawling exchange-rate target. ▪ Announce that, when the price-level target path has been reached, the peg will be abandoned, either in favor of flexible price-level targeting…or in favor of flexible inflation-targeting. ▪ Then, just do it. ▪ This will jump-start the economy and escape deflation by a real depreciation of the domestic currency, a lower long real interest rate, and increased inflation expectations.“ JEM027 – Monetary Economics 31 FX interventions – Switzerland (1/2) Release date: March 12, 2009 “ The Swiss National Bank (SNB) announced that it would take forceful action to ease monetary conditions. It decided to make another interest rate cut and act to prevent any further appreciation of the CHF against the euro. To this end, the SNB will increase liquidity substantially by engaging in additional repo operations, buying CHF bonds issued by private sector borrowers and purchasing foreign currency on the FX markets. ▪ August 2011: the SNB narrowed the key interest rate range from 0.00– 0.75 p.p. to 0.00–0.25 p.p. and sharply increased the supply of liquidity ” ▪ September 2011: the SNB set a minimum exchange rate of 1.20 CHF/EUR, stating that it would buy foreign currency in unlimited quantities if the rate fell below this level JEM027 – Monetary Economics 32 FX interventions – Switzerland (2/2) CHF/EUR exchange rate SNB’s foreign currency investments CHF billions ▪ The SBN‘s floor on the CHF/EUR exchange rate was viewed as relatively successful, even though the FX reserves had to increase significantly in some periods; but then the SNB shocked the market with a sudden exit in January 2015. Source: http://www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/monetary_policy/monitoring/download/1104_cbm.pdf JEM027 – Monetary Economics 33 CNB‘s November 2013 decision ▪ The Board decided to start using the exchange rate as an additional instrument for easing the monetary conditions, stating that: ”The CNB will intervene on the FX market to weaken the koruna so that the exchange rate is close to CZK 27/EUR.“ ▪ The exchange rate level was chosen to avoid deflation or long-term undershooting of the inflation target and to speed up the return to the situation in which the CNB will be able to use its standard instrument, i.e. interest rates. ▪ The exchange rate commitment is one-sided. This means that the CNB will prevent excessive appreciation of the koruna exchange rate below CZK 27/EUR. On the weaker side of the CZK 27/EUR level, the CNB is allowing the exchange rate to move according to supply and demand on the FX market. JEM027 – Monetary Economics 34 Literature on the Czech case ▪ Franta, M., Holub, T., Král, P., Kubicová, I., Šmídková, K., Vašíček, B. (2014): “The Exchange Rate as an Instrument at Zero Interest Rates: The Case of the Czech Republic.“ Czech National Bank, Research and Policy Note no. 3/2014, September, http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html. ▪ Malovaná, S. (2014): “The Effectiveness of Unconventional Monetary Policy Tools at the Zero Lower Bound: A DSGE Approach.” Master thesis, IES FSV UK. ▪ Alichi, A., J. Benes, J. Felman, I. Feng, C. Freedman, D. Laxton, E. Tanner, D. Vavra, and F. Zhang (2014): “Frontiers of Monetary Policymaking: Adding the Exchange Rate as a Tool to Combat Deflationary Risks in the Czech Republic.” IMF Working Paper, September (forthcoming). JEM027 – Monetary Economics 35 Reasons for the decision to act ▪ The November 2013 forecast identified a need for significant further monetary policy easing. ▪ The disinflation process was seen as driven primarily by insufficient demand, not by favourable supply-side shocks. ▪ Therefore, the view prevailed that the CNB could not apply an ’escape clause‛, thus temporarily ignoring the deviation from target. ▪ Declining inflation expectations were shifting the real interest rates in the opposite direction than needed. ▪ The passive monetary policy scenario showed a high probability of inflation turning negative in early 2014. ▪ The risk assessment pointed to high potential costs of a policy error for the passive approach, and to a higher probability of such an outcome than implied by the core analyses. ▪ Therefore, the need for action became quite obvious. See: http://www.cnb.cz/en/monetary_policy/weakening_koruna/index.html JEM027 – Monetary Economics 36 Passive MP scenarios – November 2013 4 He adline inflation (y/y in %) 27 CZK/EUR 3 26 2 1 25 0 -1 I/12 III 1,4 I/13 III I/14 III I/15 III 24 I/12 III I/13 5 3M PRIBOR (in %) 1,2 0,6 2 0,4 1 0,2 0 0,0 III I/15 III III I/15 III Baseline scenario Passive MP Passive MP +ER shock 3 0,8 I/14 GDP (y/y in %) 4 1,0 III -1 -0,2 -2 -0,4 -0,6 -3 I/12 III I/13 III I/14 III I/15 III I/12 III I/13 III I/14 ▪ Passive monetary policy would be associated with negative inflation, nominal exchange rate appreciation and weak economic recovery. ▪ The CNB perceived a risk of the short-term negative inflation turning into protracted deflation. Source: http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html JEM027 – Monetary Economics 37 The choice of instrument ▪ First round of contingency planning took place already in 2009. ▪ The debate intensified and became more specific in 2012. ▪ Discussed the full menu of options available in the literature. ▪ The choice reflected the specific Czech conditions: – Negative rates: besides general doubts, there are legal constraints in CZ – Forward guidance: CNB has been publishing interest rate path since 2008; the guidance was strengthened in November 2012: ”The rates will remain at zero level over a longer horizon until inflation pressures increase significantly.“ – – – – QE: banking sector saturated with liquidity, already low LT gov‘t bond yields Qualitative easing: shallow private bond markets, no market disruptions Price level targeting: IT regime has served us well FX interventions / exchange rate: clearly the most effective tool in a small open economy with no FX balance sheet mismatches See: http://www.cnb.cz/en/monetary_policy/weakening_koruna/index.html JEM027 – Monetary Economics 38 Exchange rate pass-though at the ZLB Interest Rate CZK/EUR Real Consumption Growth (YoY) 1 1.2 0.6 ZLB=1q 0.4 ZLB=1q 1 ZLB=2q ZLB=3q 0.8 ZLB=4q 0.6 0.2 ZLB=2q ZLB=3q 0.5 ZLB=4q 0 0.4 0.2 0 -0.5 0 I/11 I/12 I/13 I/14 I/15 I/11 I/12 CPI Inflation (YoY) I/13 I/14 I/15 I/11 I/12 Real GDP Growth (YoY) I/13 I/14 I/15 Real Export Growth (YoY) 1 1 0.5 1 0.5 0 0 0.5 -0.5 -0.5 -1 0 I/11 -1.5 I/12 I/13 I/14 I/15 I/11 I/12 I/13 I/14 I/15 I/11 I/12 I/13 I/14 I/15 ▪ Exchange rate pass-trough is likely to be higher than in normal times due to: (i) a more durable nature of the currency move; (ii) ZLB, which implies no offsetting reaction from the interest rates. ▪ The longer is the ZLB binding (and the more expected this is), the higher the ERPT and the more positive impact on GDP and consumption. Source: http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html JEM027 – Monetary Economics 39 All CNB‘s ZLB scenarios compared 4 He adline inflation (y/y in %) 4 3 3 2 2 1 1 0 0 -1 -1 I/12 III 1,4 I/13 III I/14 III I/15 III I/12 5 3M PRIBOR (in %) 1,2 3 0,8 2 0,6 III I/13 III I/14 III I/15 III I/15 III GDP (y/y in %) Baseline scenario Passive MP Passive MP +ER shock Alternative scenario 4 1,0 1 0,4 0,2 0 0,0 -1 -0,2 -2 -0,4 -3 -0,6 I/12 ▪ M P-re levant inflation (y/y in %) III I/13 III I/14 III I/15 III I/12 III I/13 III I/14 III The relevant policy comparison was between the alternative scenario with exchange rate instrument and the passive MP scenario(s) – here the difference was clearly favourable for all major variables (plus recall the uncertainty as regards the return to the target with passive MP). Source: http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html JEM027 – Monetary Economics 40 The exchange rate since the decision CZK/EUR rate, CNB commitment and FX interventions 29 8 7 28 6 5 27 4 3 26 2 1 25 1/13 4/13 7/13 10/13 1/14 FX interventions (rhs, EUR bil.) 4/14 7/14 10/14 CZK/EUR (lhs) 1/15 4/15 7/15 0 10/15 Exchange rate commitment (lhs) ▪ After the CNB‘s policy announcement, koruna reached 27 CZK/EUR quickly, and has been moving at somewhat weaker levels since then. ▪ Actual interventions were quite massive in November 2013, but took place only for a few days after the policy decision of the CNB. ▪ Another round of interventions started in July 2015. Source: http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html JEM027 – Monetary Economics 41 Macroeconomic developments so far Dostupné k 7.11.2013 II/13 -1.3 9/13 1.0 9/13 0.2 9/13 7.1 Gross domestic product (s.a.) Consumer price index Monetary-policy relevant inflation General unemployment rate (in %, s.a.) Average nominal wage in business sector (in CZK, s.a.) II/13 25,199 Average nominal wage II/13 1.2 Number of vacancies 9/13 39,040 Composite confidence indicator (index) 10/13 88.9 Dostupné k 21.10.2015 II/15 4.6 9/15 0.4 9/15 0.3 8/15 5.1 II/15 26,188 II/15 3.4 9/15 102,772 9/15 95.9 ▪ ▪ All key macroeconomic indicators look better now compared to November 2013. ▪ This mainly reflects strong imported anti-inflationary pressures (see the next slide). The only exception is inflation, which is farther below the CNB‘s target now than in 2013 (MP-relevant inflation is almost the same as in September 2013. JEM027 – Monetary Economics 42 Domestic CPI vs. foreign PPI outlook Czech CPI inflation and CNB‘s forecasts (in %, y/y) ▪ PPI in the effective EA and CF outlook (in %, y/y) The defletionary pressures from the euro area producer prices are much stronger and more protracted than assumed in November 2013. JEM027 – Monetary Economics 43 Conclusions 1 The room for IR cuts has been exhausted during the crisis 2 In the Phase 1, CBs mainly adjusted their refinancing operation in an effort to keep market rates close to policy rates 3 Truly unconventional measures started to be used in Phase 2 – effort to bring down LT interest rates, increase inflation expectations, weaken the exchange rate, etc. 4 In the end, the Fed and ECB did similar things during the crisis in terms of market IRs and BS-expansion, even though using different tools (and the ECB more reluctantly) 5 Communication has gained on importance as a policy tool 6 The exchange rate is a very effective UMP tool for small open economies, as illustrated by the Czech case. 7 Exit issues – beyond our scope, but very important JEM027 – Monetary Economics 44