Monetary milestones of the past 30 years: the Czech National Banks view

The Czech economy has passed a series of monetary milestones on the transformation road over the past 30 years. This article describes the most important of these: the adoption of a fixed exchange rate, the separation of the Czechoslovak koruna, the subsequent exit from the peg, the adoption of inflation targeting, the creation of a special privatization account, two appreciation bubbles and the introduction of an exchange rate floor. Moreover, this article identifies the lessons to be drawn from each milestone. While the independent koruna has at times been a useful shock absorber, it has itself been a source of shocks on several other occasions. The Czech experience with a fixed exchange rate suggests that the sustainability of this arrangement critically depends on the consistency of the overall monetary policy framework. Also, expectations can have a decisive effect on how events unfold. If the framework becomes inconsistent, timing the exit right is crucial for mitigating the adverse effects on the economy. The overall lesson is that having your own currency is great as long as you treat it well.