Pegging out: Lessons from the Czech exchange rate crisis

In May 1997 the Czech Republic abandoned its exchange rate peg, the centerpiece of macroeconomic strategy since 1991. This paper examines the usefulness of theories of speculative attack in interpreting the crisis. Significantly, after the crisis subsided, competitiveness returned to its earlier level. One interpretation is that the koruna was the innocent victim of turmoil in Asia This neglects the trend deterioration of competitiveness prior to the crisis. Hence, the crisis provoked a much-needed adjustment in fiscal policy, which altered the monetary-fiscal mis and consequent equilibrium exchange rate. Sterilization during 1994-96 delayed adjustment. Earlier abandonment of the parity would have helped only if it had also induced the required fiscal adjustment. (C) 1998 Academic Press.