Changes in monetary policy management

The Act on the State Bank of Czechoslovakia of December 1991 set the main objective of monetary policy to ensure the stability of the currency, i.e. the relative stability of the price level (expressed by low inflation) and the koruna‘s exchange rate. It was a challenging monetary concept, implemented in the early 1990s under a radical transformation of the economy, characterized by an unfinished adjustment of price relations, slow restructuring of production, underdeveloped financial market, persistent institutional and legislative environment and very low liberalization of capital flows. . This was approached by the beginning of far-reaching privatization of state property in the banking and manufacturing spheres. The development of the monetary policy management scheme and tools also corresponded to this situation. It was therefore necessary to rely initially on direct, administrative methods of issuing policy, in particular on the determination of credit and interest limits, which governed the total volume and maximum price of loans that commercial banks could provide to businesses. Since the beginning of 1991, the determination of the total volume of loans has been replaced by the determination of the development of the money supply, i.e. the total amount of money in the country, and by the fixed exchange rate of the koruna. The use of a fixed exchange rate as a "nominal anchor" of monetary developments resulted from its influence on the development of the price level in the conditions of a small open economy and was also important for the policy of gradual liberalization of state-regulated prices. Direct monetary instruments were disgracefully abolished and replaced by indirect instruments. The changes in the exchange rate area were aimed at achieving a level of the koruna's exchange rate that was uniform for all entities and for all foreign exchange operations in conditions of limited internal convertibility of the koruna, as introduced as part of liberalization measures since early 1991, and which could be maintained without changes as long as possible.