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Title: Pegging Out: Lessons from the Czech Exchange Rate Crisis

Author(s): David Begg

Publication Date: September 1998

Keyword(s): Capital Inflows, Exchange Rate Bands, Monetary Policy and Speculative Attacks

Programme Area(s): International Macroeconomics and Transition Economics

Abstract: In May 1997 the Czech Republic abandoned its exchange rate peg, the centrepiece of macroeconomic strategy since 1991. I examine the usefulness of theories of speculative attack in interpreting the crisis. Significantly, after the crisis subsided, competitiveness returned to its earlier level. One intepretation is that the koruna was the innocent victim of turmoil in Asia. This neglects the trend deterioration of competitiveness prior to the crisis. I therefore conclude that the crisis provoked a much-needed adjustment in fiscal policy, which altered the monetary-fiscal mix and consequent equilibrium exchange rate. Sterilization during 1994-6 unhelpfully delayed adjustment. Earlier abandonment of the parity would have helped only if it had also induced the required fiscal adjustment.

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Bibliographic Reference

Begg, D. 1998. 'Pegging Out: Lessons from the Czech Exchange Rate Crisis'. London, Centre for Economic Policy Research.