Working Paper: CEPR ID: DP1956
Authors: David Begg
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.
Keywords: speculative attacks; monetary policy; exchange rate bands; capital inflows
JEL Codes: E58; E65; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fiscal policy adjustments (E62) | exchange rate stability (F31) |
| speculative attacks + deterioration of economic fundamentals (F31) | abandonment of exchange rate peg (F31) |
| economic mismanagement (fiscal policy) (E62) | monetary adjustment need (E49) |
| expectations of policy adjustments (E61) | speculative behavior (D84) |