Czech Experience with Deflation

On 7th of November 2013 the Board of the Czech National Bank decided to start using the exchange rate CZK/EUR as an additional instrument for easing the monetary conditions in order to avoid the long-term undershooting of the inflation target. The aim of this paper is to contribute to the discussion on CNB Board´s resolution mentioned above showing that our country has a very bad experience with deflation. In the first part the deflation and its “good” and “bad” versions are defined. The second part deals with the Czechoslovak government´s effort to appreciate the currency, which leaded into deflation connected with economic recession. In the third part the influence of the Great Depression and of the end of the classical Gold Standard on the Czechoslovak economy is assessed. Lastly the deflation which took place at the turn of the 20th century and its possible implications on the monetary policy are mentioned.