Convergence Between the EU and Central and Eastern Europe
Edited by David G. Dickinson and Andrew W. Mullineux
Chapter 4: The link between FEER and fiscal policy in a transitional period: the case of the Czech economy
4. The link between FEER and fiscal policy in a transitional period: the case of the Czech economy ÿ Katerina Sm’dkov‡* ÿ INTRODUCTION In 1996, the Czech Republic had already been through four successful years of transition. The Czech transitional strategy was based on rapid trade and financial liberalization, the voucher privatization scheme and a stabilization programme for which a pegged exchange rate provided a nominal anchor with the support of a balanced budget. During 1993Ð96, these transitional steps led to relatively low inflation, the increasing role of the private sector, economic growth and rapid financial market development. As a consequence of these characteristics, the Czech Republic has experienced the benefits as well as the costs of capital inflow when foreign investors started showing interest in its emerging financial market. Similar to other countries in this group, the Czech economy was hit by currency turbulence1 after a period of inflows that was followed by a reversal in capital flows. In 1997, the koruna exchange rate regime was abolished, and the koruna was allowed to float. The sustainability of the exchange rate regime became a topical issue, and the question had arisen whether there was a problem of exchange rate mismanagement. The basic macro indicators give a general overview of the situation. Table 4.1 shows that the countryÕs inflation and growth records were satisfactory. Specifically, in 1994Ð96 after shocks from both the price liberalization as well as CzechoslovakiaÕs separation had been absorbed, the growth rate was high, and inflation...
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