The chimera of autonomous monetary policy in a small open economy

In small open economies, external factors exert a strong influence on the autonomy and efficiency of domestic monetary policies. For the Czech National Bank, no exchange rate regime can guarantee a lasting degree of policy autonomy. Within the present CNB's strategy of direct inflation targeting, changes of exchange rate and of world prices proved especially hard to tackle. In 1998 and 1999, a substantially faster disinflation took place than was presupposed by CNB's own inflation targets. This helped to throw the economy into a recession. A credit crunch subsequently set out of function the most important transmission channel of monetary policy. Inflation targets were repeatedly undershot, and only a strong capital inflow initiated the money supply growth for economic recovery. A lower level of ambition to steer the economy via autonomous monetary policy is probably desirable. The "fast solutions" - a currency board, or an immediate takeover of the EUR - are neither feasible, nor would they be clearly beneficial at the present stage.

Keywords: monetary policy, inflation, exchange rates, international monetary arrangement and institutions