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Financial Cycles and the Real Economy

Financial Cycles and the Real Economy

Lessons for CESEE Countries

Edited by Ewald Nowotny, Doris Ritzberger-Grünwald and Peter Backé

What is the link between the financial cycle - financial booms, followed by busts - and the real economy? What is the direction of this link and how salient is this connection? This unique book examines these fundamental questions and offers a paramount contribution to the debate surrounding the recent financial and economic crisis.

Chapter 8: Two Czech crises revisited: pantarhei

Eva Zamrazilová and Václav Žďárek

Subjects: economics and finance, financial economics and regulation, money and banking


There is not enough room to describe all the steps that the Czech economy went through in the 1990s, so this chapter will offer a brief sketch instead. As a former centrally planned economy (CPE), the economy suffered from many ‘illnesses’ that had to be remedied, and policy-makers opted to do so the Czech way. A radical reform implemented in 1991 was followed by the peaceful split-up of the Czechoslovak Federation in 1992. The independent Czech Republic kept to the previously charted course and, as a result, its initial results exceeded expectations, and praise and rewards were heaped upon it; for example, membership of international organizations – such as the Organisation for Economic Co-operation and Development (OECD) in 1995 – and praise for its achievements at international events. However, the flip side of the coin was not particularly good: serious flaws in the system of laws, a rapid build-up of external and internal imbalances, unfinished transformation and restructuring of many (quasi-) state-owned firms, to give just a few examples. On the other hand, the country had a history of a low-inflation and low-state-debt environment, traditional consumption patterns, and so on. Two stories will be told in this chapter: stories the effects and implications of which were, and are, different.

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