Effect of foreign exchange interventions of the CNB inflation in the Czech Republic in the years 2013-2016

In November 2013 the Czech National Bank decided to use the exchange rate as the new tool of monetary policy. Czech central bank decided to perform interventions in the foreign exchange market so it could prevent the appreciation of the Czech crown below the level of 27 CZK for 1 EUR. The main objective was to stimulate inflation and fight deflationary pressures that occur across Europe. The main objective of this thesis is to evaluate the adequacy of this decision and to assess what actual impacts this policy had on the Czech economy. Comparison and analysis are the methods chosen to achieve the main objective of this thesis. The thesis contains description of the monetary policy and effects of inflation and deflation, also emphasis is given on the reason why Czech National Bank intervenes on foreign exchange market, the inflation targeting. Practical part of the thesis focuses on the analysis of macroeconomic indicators before the interventions, and then after the interventions begun. The major part is devoted to price increases. Based on the analysis results we conclude that foreign exchange interventions had its importance, and that the Czech National Bank has at least managed to keep some very low inflation and prevent deflation. However, it is a question for a further debate whether mild deflation, which is caused by positive cost shock, is really such a threat