Jaromír Šindel ECES Conduct of Monetary and Fiscal Policy The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague.

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Jaromír Šindel ECES Conduct of Monetary and Fiscal Policy The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Topics Fiscal Policy during transformation –New role of government in society –New fiscal, tax system –Political cycle Monetary Policy during transformation –New monetary system –Case studies: Czech republic, Poland and Hungary –Monetary and exchange rate based stabilization programmes (next lecture) –Financial and banking crisis (question of capital mobility, next lecture) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Fiscal Policy during transformation New role of government in society –Lower subsidies –From vertical to horizontal relationships in economy What does goevernment do? Collecting taxes and paying transfers (natural or in money). The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

New tax system : VAT example The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Lots of changes?

New tax system : VAT example The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

New tax system : VAT example The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Czech Republic - deficit The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: IFS

Czech Republic – government taxes and expenditures The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: MF ČR Consolidated tax burden (% GDP) Gov. Expenditures without net borrowing and subsidies to transformation institutions (% GDP)

Czech Republic – gov. balance (% GDP) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: MF ČR With net borrowing Without net borrowing and subsidies to transformation institutions

Czech R. – consolidated gov. debt The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: MF ČR Mld. CZK In % of GDP

Fiscal Policy during transformation Political cycle –The collected works of James Buchanan The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Monetary Policy during transformation New monetary system –From 1 level banking system to 2 level (central and commercial banks) –State Bank of Czechoslovakia The change of banking system was prepared before transformantion Case studies: Czech republic, Poland and Hungary –Different approaches to the monetary policy but with the same problems The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Monetary Policy Strategy in Czech rep. Targeting of M2 growth (M2 = domestic and foreign monetary assets) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague YearTarget Reality 1993Original 17,0 % Modified 19,0 % 20,0 1994Original 12,0 – 15,0 % Modified 17,0 % 20, ,0 – 17,0 % 19, ,0 – 17,0 % 7, ,0 – 12,0 % 8,7 Why modified targets? Because of the inflow of the foreign capital Source: CNB

Monetary Policy Strategy in Czech rep. Targets for net inflation (inflation without regulated prices and impact of indirect or subsidies) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague … but changes … YearTargetTarget monthSet in Reality 19985,5 - 6,5 %December 1998 December , ,0 - 5,0 %December 1999November , ,5 - 5,5 %December 2000 December , ,0 – 4,0 % December 2001 April , ,0 – 3,0 % December 2005 April 1999 Source: CNB

Monetary Policy Strategy in Czech rep. Inflation target (consumer price index) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague MonthTarge levelTarget monthSet in Band startsjanuary %january 2002 april 2001 Band ends december % december 2005 inflation target from 2006 till Euro adoption 3 % (alowed  1 p.p.) … and changes … Source: CNB

Monetary Policy Strategy in Czech rep. Source: CNB History of inflation targets in Czech republic in picture The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Monetary Policy Strategy in Poland The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries

Monetary Policy Strategy in Poland The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Inflation targets in Poland Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries

Monetary Policy Strategy in Poland The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Inflation vs. Targets Fiscal deficits and Wages Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries

Monetary Policy Strategy in Poland The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Exchange rate (PLN) and Real Interest Rates Monetary Conditions Index Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries

Monetary Policy Strategy in Hungary The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries

Monetary Policy Strategy in Hungary The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Inflation targets in Hungary Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries

Monetary Policy Strategy in Hungary The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Inflation vs. Targets Food Price Indexes Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries

Monetary Policy Strategy in Hungary The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Fiscal deficits and Wages Exchange rate (HUF) and Interest Rate (3 month) Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries

Lessons for future. The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Make a project for price liberalization at Cuba and China. Goals, solutions, reasons.