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Pegging Out: Lessons from the Czech Exchange Rate Crisis

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  • Begg, David

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1956.

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Date of creation: Sep 1998
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Handle: RePEc:cpr:ceprdp:1956

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Keywords: Capital Inflows; Exchange Rate Bands; Monetary Policy; Speculative Attacks;

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  1. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  2. Velasco, Andres, 1996. "Fixed exchange rates: Credibility, flexibility and multiplicity," European Economic Review, Elsevier, vol. 40(3-5), pages 1023-1035, April.
  3. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  4. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  5. Sachs, Jeffrey D, 1996. "Economic Transition and the Exchange-Rate Regime," American Economic Review, American Economic Association, vol. 86(2), pages 147-52, May.
  6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  7. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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