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Financial and Monetary Integration in the New Europe

Convergence Between the EU and Central and Eastern Europe

Edited by David G. Dickinson and Andrew W. Mullineux

Potential new entrants to the European Union from Central and Eastern European countries face many challenges to achieve financial convergence with the existing EU nations. Using detailed case studies from Bulgaria, the Czech Republic, Latvia, Lithuania and Poland and analysis of cross country data from these regions, Financial and Monetary Integration in the New Europe looks at the key issues for applicant countries as they negotiate the terms of their membership in the European Union. Of major concern to these countries is the financial sector and its implications for economic growth and the conduct of macroeconomic policy. The book examines, in particular, monetary and exchange rate policies, banking regulation and financial market efficiency. The overall impact of building a market driven financial system on economic development is also explored.
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Chapter 3: The Czech approach to inflation targeting

Convergence Between the EU and Central and Eastern Europe

Miroslav Hrncir and Katerina Smidkova


ÿ Miroslav Hrnc’r and Katerina Sm’dkov‡* ÿÿ ÿ INTRODUCING INFLATION TARGETING In December 1997, the Czech National Bank (CNB) announced that it would switch to inflation targeting. After eight years of relying on intermediate targets, this represented a historic change in the strategy of monetary policy. It is worth noting that price stability has always been the ultimate target of Czech monetary policy. However, there were different strategies applied to reaching this long-term target. In the framework of inflation targeting, the inflation targets have been explicitly specified in terms of net inflation derived from consumer price index (CPI) inflation for two time horizons: net inflation to be 6 per cent ±0.5 per cent by the end of 1998 and 4.5 per cent ±1 per cent by the end of the year 2000. (See Figure 3.1.) A Short History The stability of the Czech koruna has been the ultimate monetary policy target of the CNB according to bank law since the very beginning of the bankÕs existence.1 In 1993, the Czech Republic had reached the halfway mark in both the transitional process and the process of disinflation. As a consequence, it was necessary to derive the strategy of monetary policy from some concept of medium-term stability. During 1993Ð97, before switching to inflation targeting, the CNB had used three strategies. All three were based on working with intermediate targets and were to a significant extent affected by the transitional process. For example, instruments were being changed quite often as financial markets progressed from...

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