ABSTRACT
In transitional economies, shallow intermediation of loanable funds and sizeable foreign financial flows increase the volatility of exchange and interest rate dynamics as well as money and credit growth. A key element of the credit channel is the external finance premium. As transitional economies are small and open, the exchange rate and forex market interventions have a crucial role in the monetary transmission mechanisms. In banks, acceleration of credit growth caused not only maturity mismatch but also a deterioration of claims quality. The bank-lending channel effects could therefore be propagated and modified by the standard exchange-rate channel effects in open transition economies facing an unsettled financial structure and volatile foreign financial flows. Timing and size of changes in some components of capital inflow therefore only weakly correspond to the changes in 'atolar parts' of the bank balance sheets. Dates of launching new instruments for containing and neutralising foreign financial inflows are marked by a star.
