The zero level of interest rates constitutes a limit of this standard monetary policy instrument. Based on the example of the Czech Republic we argue that in such a situation foreign exchange interventions represent a meaningful monetary policy tool for small open economies not facing serious liquidity problems. Existing studies also suggest that potential financial losses of central banks stemming from the buildup of international reserves do not necessarily compromise credibility or the ability to pursue monetary policy objectives. We provide an overview of the evidence on the functioning of FX interventions and the exchange rate pass-through to consumer prices. Using simulations which take into account the existence of the zero lower bound, we argue that in such a situation the pass-through can be much larger than the existing evidence suggest.
Lubomír Lízal, Jiří Schwarz (2013), "Foreign Exchange Interventions as an (Un)Conventional Monetary Policy Tool." BIS Paper, 73i.