Currency turbulence in 1997 in the Czech Republic

The Czech economy experienced a standard shake-up triggered by a gradual build-up of external imbalance that ended up with a speculative attack. As a result of the many institutional bottlenecks, the supply side of the economy was unable to keep pace with the rapid expansion in domestic demand. The mounting external imbalance was also linked with considerable internal imbalances. The contagion came in May 1997 from South-East Asia. Them followed a sharp weakening of the CZK. The CNB opted for a strategy of liquidity squeeze. Escalation of the crisis led to the adaption of managed floating of the CZK finally. The first signals of a calming of the situation emerged at the start of June. It became possible to launch a strategy to bring interest rates down. This process lasted until around the end of August. The price paid for eliminating the external imbalance was economic recession.

Keywords: stabilization policy, external imbalance, speculative attack, capital controls, political cycle