ABSTRACT
In this chapter, the authors discuss the rationale for the different choice of exchange rate systems among the Central European economies. They contrast the durability of the Czech fixed peg, which held until the summer of 1997, with the more transitory Polish attempts at exchange rate fixity in 1990. The authors argue that optimum currency area considerations combine with different domestic macroeconomic conditions to account for the different outcomes in Poland and the former Czechoslovakia. The Polish case highlights the difficulties of using a pegged exchange rate as a nominal anchor to attempt to stabilize high rates of inflation. The Czech Republic, on the other hand, illustrates the danger of how even a "successful" peg can lead to imported inflationary pressures from abroad and also how quickly a strong balance of payments position can sometimes turn into a weak one.
