Monetary Policy Frameworks for Emerging Markets

Monetary Policy Frameworks for Emerging Markets

Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad

Financial globalization has made monetary policy formulation in emerging market economies increasingly complicated. This timely set of studies looks at the turmoil in global financial markets, which coupled with volatile inflation poses serious challenges for central banks in these countries. Featuring papers from the research frontier and front-line policymakers in developing and emerging market economies, the book addresses questions such as ‘What monetary policy framework is most suitable for these countries to confront the new challenges while they continue to open up to trade and financial flows?’, ‘What are the linkages between monetary stability and financial stability?’ and ‘Is inflation targeting or a fixed exchange rate regime preferable for developing and emerging markets?’

Chapter 11: Czech Experience with Inflation Targeting

Ludek Niedermayer

Subjects: development studies, development economics, economics and finance, development economics, money and banking

Extract

Luděk Niedermayer In January 1998, the Czech National Bank (CNB) joined the small club of central banks using inflation targeting as their monetary policy framework. The main proponents of that regime in the 1990s were the central banks of New Zealand, Canada and the UK. At that time, and even some years later, many academics, central bankers and institutions (including the International Monetary Fund, IMF) were skeptical about how suitable and feasible such a framework was for central banks of emerging or catching-up economies. From that point of view, the decision of the Czech National Bank has provoked many of these concerns, as the adoption of inflation targeting took place after very short preparation, soon after a currency crisis and at a time of big uncertainty about the future path of the economy. 11.1 ECONOMIC SITUATION IN THE EARLY 1990s Up to November 1989, the former Czechoslovakia was a rigid, centrally planed communist country. In January 1991, liberal economic reform started, with the liberalization of prices, foreign trade and capital flows, privatization and the introduction of a fixed exchange regime. The fixed exchange rate (against a foreign trade weighed basket) was central to monetary policy, despite the formal setting of monetary targets, until the beginning of 1996. In practice, the fixed exchange rate was also the key element of the entire macroeconomic policy, and the nominal anchor of the stabilization process. In February 1996, after sweeping liberalization of capital flows related to Organisation for Economic Co-operation and Development (OECD)...

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