Monetary and Exchange Rate Policy During Transformation: Experience and Recommendations

Abstract

Many Central and East European countries started the process of transforming their economies at the beginning of the 1990s. This start was very difficult. Inflation was high, the domestic currency was not respected, and therefore stabilisation was the most important short-term target for macro-economic policy. On the other hand, the transformation process meant much more: creating a market economy. That was a challenge going far beyond macro-economic stabilisation. Promoting entrepreneurship, building the legal and systemic infrastructures required for effectively functioning markets, privatising of state-owned enterprises and stimulating the competitiveness of domestic industries - these were the all encompassing goals for general government policies. The ultimate objective for all these countries could be described with a single phrase: ‘catching-up with the West’. Permanent economic growth that was sustainable in the long run was an important pre-condition. This common policy objective notwithstanding, ways to reach it were as diverse as the countries involved. These differences can clearly be demonstrated in the area of monetary policy, where every transition country adopted a different strategy and used its own distinctive means of implementation.