The International Monetary Fund published a Selected Issues Paper applying its Integrated Policy Framework (IPF) to the Czech Republic to support the use of scenario analysis at the Czech National Bank (CNB). The analysis identifies shallow foreign exchange (FX) markets as the main relevant friction and notes that inflation expectations, while generally well anchored, can deviate from the inflation target for extended periods. Using an extended version of the QIPF model, the paper broadens the analysis beyond traditional external shocks to include domestic fiscal policy shocks and central bank balance sheet normalization. It finds that a global risk-off outflow shock can be better stabilised through a combined use of FX reserves and interest rate policy; refocusing fiscal stimulus toward more productive uses materially reduces the monetary policy tightening needed to stabilise inflation at target; and balance sheet normalization is optimally gradual and preannounced, with potential currency appreciation in principle mitigated through a slightly lower policy rate.
International Monetary Fund 2026-04-23
International Monetary Fund applies Integrated Policy Framework to Czech Republic scenarios and finds gains from combining FX reserves with interest rate policy
The International Monetary Fund published a Selected Issues Paper applying its Integrated Policy Framework to the Czech Republic to support scenario analysis at the Czech National Bank, identifying shallow foreign exchange markets and occasionally unanchored inflation expectations as key frictions. Using an extended QIPF model, the paper finds that global risk-off shocks are best stabilised through combined use of foreign exchange reserves and interest rates, that productive fiscal stimulus reduces required monetary tightening, and that balance sheet normalisation should be gradual and preannounced, with potential currency appreciation offset by a slightly lower policy rate.