ABSTRACT

In 1990 the government of the former Czechoslovakia pegged the Czechoslovakian koruna to a currency basket. This chapter discusses the type of causality in the case of the Czech Republic. The liberalization process was extended to capital account flows. Currency convertibility, similar to that in developed market economies, was achieved quite rapidly in many transitioning countries. The official exchange rate of the Czechoslovak koruna has been tied to a currency basket since the early 1980s. Accordingly, when the authorities of the former Czechoslovakia opted for a fixed exchange rate regime in 1990, pegging the Czechoslovak koruna to a currency basket within a rather narrow band of ±0.5 percent, this seemed a small change from the previous system. The standard definition of an equilibrium exchange rate says that this rate ensures the simultaneous attainment of internal and external balance.