Monetary Policy during Transition: Progress and Pitfalls in Central and Eastern Europe, 1990-6.

Monetary policy rarely accomplished stabilization if sound fiscal policy had not already been established. Distinctions between different nominal anchors can be exaggerated. Any credit crunch owed more to micro distortions than to tight money. Initial stabilization did not always precede the resumption of growth, but there is little evidence that more gradual transition would have made disinflation easier. Thereafter, countries usually experienced large capital inflows whatever the ostensible exchange-rate regime. Fiscal tightening and more exchange-rate flexibility offer a sounder eventual response. Poor incentives and corporate governance in banks should have been anticipated: subsequent improvements were slow and costly. Large investments in writing off bad debt and providing adequate resources for supervision made monetary transmission more reliable, and hardened budget constraints through which the price mechanism could improve efficiency. Copyright 1997 by Oxford University Press.