Jaromír Šindel ECES Conduct of Monetary and Fiscal Policy The Puzzles of Central and Eastern...

Jaromír Šindel

ECES

Conduct of Monetary and Fiscal Policy

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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)

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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).

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New tax system: VAT exampleT

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Lots of changes?

http://europa.eu.int/comm/taxation_customs/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_2005_en.pdf

New tax system: VAT exampleT

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Czech Republic - deficitT

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Czech Republic

Deficit to GDPYear Deficit pct chg Year GDP pct chg Year Def/GDP

2004 -93,7 -14,1% 2004 2750,26 7,6% 2004 -3,41% 2003 -109,1 139,4% 2003 2555,78 5,8% 2003 -4,27% 2002 -45,6 -32,9% 2002 2414,67 4,3% 2002 -1,89% 2001 -67,9 47,3% 2001 2315,26 7,7% 2001 -2,93% 2000 -46,1 55,2% 2000 2150,06 5,3% 2000 -2,14% 1999 -29,7 1,7% 1999 2041,35 4,0% 1999 -1,45% 1998 -29,2 83,6% 1998 1962,48 9,9% 1998 -1,49% 1997 -15,9 783,3% 1997 1785,13 7,5% 1997 -0,89% 1996 -1,8 -125,0% 1996 1660,65 13,2% 1996 -0,11% 1995 7,2 -30,8% 1995 1466,68 24,0% 1995 0,49% 1994 10,4 845,5% 1994 1182,78 15,9% 1994 0,88% 1993 1,1 1993 1020,28 1993 0,11%

GDPGovernment Deficit

Source: IFS

Czech Republic – government taxes and expenditures

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Consolidated tax burden (% GDP)

Gov. Expenditures without net borrowing and subsidies to transformation institutions (% GDP)

Czech Republic – gov. balance (% GDP)

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With net borrowing

Without net borrowing and subsidies to transformation institutions

Czech R. – consolidated gov. debtT

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Mld. CZK

In % of GDP

Fiscal Policy during transformation• Political cycle

– The collected works of James Buchanan• http://www.econlib.org/library/Buchanan/buchCContents.html

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http://www.econlib.org/library/Buchanan/buchCContents.html














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

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Monetary Policy Strategy in Czech rep.

Targeting of M2 growth (M2 = domestic and foreign monetary assets)

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Year Target Reality

1993 Original 17,0 % Modified 19,0 % 20,0

1994 Original 12,0 – 15,0 % Modified 17,0 % 20,8

1995 14,0 – 17,0 % 19,4

1996 13,0 – 17,0 % 7,8

1997 8,0 – 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)

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… but changes …

Year Target Target month Set in Reality

1998 5,5 - 6,5 % December 1998 December 1997 1,7

1999 4,0 - 5,0 % December 1999 November 1998 1,5

2000 3,5 - 5,5 % December 2000 December 1997 3,0

2001 2,0 – 4,0 % December 2001 April 2000 2,4

2005 1,0 – 3,0 % December 2005 April 1999

Source: CNB

Monetary Policy Strategy in Czech rep.Inflation target (consumer price index)

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Month Targe level Target month Set in

Band starts january 2002 3 - 5 % january 2002

april 2001Band ends

december 2005

2 - 4 %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

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Monetary Policy Strategy in PolandT

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Inflation targets in Poland

Source: Horská, H.: Inflation Targeting in the Central Eastern European Countries. 2004. www.horska.com


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Inflation vs. Targets Fiscal deficits and Wages



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Exchange rate (PLN) and Real Interest Rates Monetary Conditions Index


Monetary Policy Strategy in HungaryT

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Inflation targets in Hungary



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Inflation vs. Targets Food Price Indexes



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Fiscal deficits and Wages Exchange rate (HUF) and Interest Rate (3 month)


Lessons for future. T

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• Make a project for price liberalization at Cuba and China.

• Goals, solutions, reasons.

Jaromír Šindel ECES Conduct of Monetary and Fiscal Policy The Puzzles of Central and Eastern...

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Transcript of Jaromír Šindel ECES Conduct of Monetary and Fiscal Policy The Puzzles of Central and Eastern...