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The Value of Transparency in Conducting Monetary Policy: Czech Experience

English Pages, 12. 10. 2001

My remarks reflect more my political experience during the last decade after the fall of communism in my country and elsewhere than any well-defined theoretical position.

1.       As I see it, transparency does not represent the main and most important issue of monetary policy. Transparency itself is undoubtedly a positive feature, but to concentrate on transparency without taking into consideration other things means missing, if not hiding, something which is more relevant.

2.       In my understanding, the more relevant issues or the prior issues are the quality of the monetary regime and the way how monetary policy reflects the preferences of society. An error in any of them is very costly.

3.       Let me start with the second issue, with the problem of the independence of the central bank. I must admit I have a problem with it - as someone who, as minister of finance, introduced it into my country. I can probably afford to make such a “politically incorrect” statement here because I have some justification for it. In the communist era, we were - among other things - dreaming about rational monetary policy and we considered the independence of a central bank to be a necessary precondition for it. Now, after 12 years of its absolute independence in my country, I see this issue in a more complicated way. I see it as a principal-agent problem. There are many arguments that the central bank should be just an agency, which operates to meet policy objectives set by society or its legal representatives. In accordance with this view, the independence of a central bank should be limited to the independence in choosing instruments, not policy objectives. This is not, however, the case in my country. Transparency is, therefore, not the main issue.

4.       Looking at the title of the panel, we are supposed not to speak about monetary regimes but about monetary policy. Nevertheless, it seems to me that there is a difference in transparency between the regime of discretionary monetary policy and the regime of policy of rules. Discretionary policy cannot be - perhaps even should not be - transparent (as I understand transparency).  

5.       My personal experience with pegged exchange rate policy, which was considered to be the most suitable policy for transition economies 10 years ago, is not a good one. I was very much afraid of accepting it at the end of 1990 but at that time the IMF did not listen to any disobedience in this respect. This policy, however, in the first half of the 1990´s brought about (or at least made possible) better economic fundamentals in my country than in other transition economies. It was, however, undermined by the premature introduction of full convertibility of the Czech crown and by the resulting (or perhaps parallel, but independent) large inflow of foreign capital into the country. This coincidence of events led, of course, to the excessive growth of money supply.

Our central bank tried not to be passive and started to interfere with the money supply, which was an expected error. To combine two different rules (or regimes) whether in a transparent or nontransparent way – pegged exchange rate and monetary targeting - had very unpleasant consequences.

To return to our topic, we can say that the policy of pegged exchange rates was transparent but in the world of global massive movements of capital it contained inherent risks. When investors lose trust in the currency and start speculative attack against it, the pegging must be abandoned, which is not costless. The transition from one type of monetary rule to another is connected with instability, which is especially true for a small, open, transition economy with weak and shallow markets.

7.       Our country finally moved to inflation targeting which is in a favourable interpretation a more complex policy regime than simple monetary targeting or pegged exchange rate regime but in another interpretation it is a resignation on accountable policy. It requires using the whole mix of central bank instruments but no one knows in advance which of them will be used. In this respect, inflation targeting is not transparent and our experience forces me to argue that its results (at least its short term results) are very dubious.

8.       The Czech experience demonstrates that pegged exchange rate policy is suitable before deregulation of capital flows, whereas after it floating is inevitable. It shows as well the problems of inflation targeting in a transition economy. Our central bank did not have sufficient experience with monetary policy and in addition to it chose an extremely low inflation target which slowed down the economy too much and after that we could not get out of deflation.

9.       The inflation targeting can have meaning only on condition of hitting the inflation target, which in our case was not done. The missing of the target was enormous, instead of 6% inflation we got deflation. Somebody can argue that it was an accidental mistake but I am not so sure.

10.     To conclude, transparency has a meaning and plays a positive role only when all other preconditions of monetary policy are in place.

Václav Klaus, Notes for the St. Louis Monetary Conference, Federal Reserve Bank of St. Louis, October 12, 2001