Study on the Impact of CNB's Foreign Exchange Interventions on the Labor Market in the Czech Republic

Despite of a generous system of unemployment benefits, the unemployment levels in the Czech Republic are being stuck substantially below the EU average. This study examines the impact of short-term foreign exchange intervention in 2013 and 2014 on the Czech labor market. We focus on the case of Czech Republic as small open economy with own currency where the exchange rate intervention is an efficient tool of monetary policy in times of extremly loose monetary conditions. We argue that foreign exchange interventions can effectively improve the labor market indicators in times of expected inflation when traditional monetary policy tools can not be applied. We show various effects of the initial foreign exchange intervention on selected segments of the Czech labor market. Our analysis has confirmed that the number of job vacancies increased by effect of foreign exchange intervention. But, obviously, increased demand for labor was not satisfied by the supply, and the unemployment rate, despite high rigidities, was well below the level of NAIRU. In fact, we have identified a negative effect of the CNB interventions on the number of employees and an accelerating growth of wage rate. We found that the impact of foreign exchange interventions on the labor market in the Czech Republic was similar to other economies with this experience, but the intensity was substantially different.