Czech Republic scenario analysis: Using the Integrated Policy Framework (IPF)

Scenario Analysis for theCzech Republic – Usingthe Integrated Policy Thomas Gade, Jesper Lindé, and Lukas Boer SIP/2026/034 IMF Selected Issues Papers are prepared by IMF staff asbackground documentation for periodic consultations withmember countries.It is based on the information available at 2026APR European Department Authorized for distribution by Vincenzo Guzzo IMF Selected Issues Papersare prepared by IMF staff as background documentation for periodicconsultations with member countries.It is based on the information available at the time it was ABSTRACT:This paper applies the IMF’s Integrated Policy Framework (IPF) to the Czech Republic with theaim of contributing to the use of scenario analysis at the Czech National Bank (CNB). The paper identifiessome shallowness of FX markets as the main relevant friction under the IPF. Moreover, while inflationexpectations are generally well anchored, they can nevertheless deviate from the inflation target for extendedperiods. Using an extended version of the QIPF model, the paper broadens the scope of analysis beyondtraditional external shock scenarios, to also include domestic fiscal policy shocks and central bank balance RECOMMENDED CITATION:Gade, T., Lindé, J. and L. Boer, 2026. “Scenario Analysis for the CzechRepublic – Using the Integrated Policy Framework (IPF).” IMF Selected Issues Papers 2026/34. Scenario Analysis for theCzech Republic – Usingthe Integrated Policy Czech Republic Thomas Gade, Jesper Lindé, and Lukas Boer CZECH REPUBLIC SELECTED ISSUES March4, 2026 ApprovedByEuropean Department Prepared By Thomas Gade and Lukas Boer (both EUR),and Jesper Linde (MCM) CONTENTS SCENARIO ANALYSIS FOR THE CZECH REPUBLIC – USING THE INTEGRATED POLICY FRAMEWORK (IPF) _____________________________________________________________________2 A. Introduction ___________________________________________________________________________2B. The IPF Framework in the Context of the Czech Republic ______________________________3C. An Empirical Assessment of IPF Frictions for the Czech Republic_______________________4D. Policy Tradeoffs Using the IMF’s QIPF Model __________________________________________9 BOX 1. Robustness Check of FX Market Shallowness_________________________________________11 FIGURES 1. FX Market and CNB Participation_______________________________________________________42. FX Market Shallowness and Liquidity Indicators________________________________________53. Foreign Assets and Liabilities___________________________________________________________74. Pass-through and Inflation Expectations _______________________________________________85. Scenario 1 – Global Financial Risk-Off Shock _________________________________________106. Scenario 2 – Expansionary Fiscal Policy ______________________________________________13 References______________________________________________________________________________16 CZECH REPUBLIC SCENARIO ANALYSIS FOR THE CZECH REPUBLIC –USING THE INTEGRATED POLICY FRAMEWORK (IPF) This paper applies the IMF’s Integrated Policy Framework (IPF) to the Czech Republic with the aim ofcontributing to the use of scenario analysis at the Czech National Bank (CNB). The paper identifiessome shallowness of FX markets as the main relevant friction under the IPF. Moreover, while inflationexpectations are generally well anchored, they can nevertheless deviate from the inflation target forextended periods. Using an extended version of the QIPF model, the paper broadens the scope ofanalysis beyond traditional external shock scenarios, to also include domestic fiscal policy shocks andcentral bank balance sheet normalization. The paper finds that (i) in the event of a global risk-off A.Introduction 1.Scenario analysis has become an integral part of central banks’ assessment of risksaround the baseline.Over the years, major central banks have increasingly incorporated scenario analysis into monetary policy decision-making frameworks to assess risks around the baseline.1Thefrequent shocks (including the pandemic, swings in food and energy prices, and disruptions to globaltrade) in recent years have underscored the benefits of applying scenario analysis to assess the 2.The Czech National Bank is updating its monetary policy analytical and forecastingframework, further strengthening its long-standing use of scenario analysis.The CNB regularlyuses both baseline and alternative scenarios to inform its monetary policy decisions. These scenariosrange from simple simulations, e.g., holding selected variables constant, to more complex alternative projections, together with more advanced scenario analysis, is expected to play a critical role in this 3.Using the IMF’s Integrated Policy Framework (IPF), this paper explores the policytradeoffs - and the adequacy of available policy instruments - under certain tail-risk scenarios. Section B outlines the IPF in the context of the Czech economy. Section C provides an empiricalas