Thus, one cannot say that privatisation has been as yet accomplished fully. What remains, however, is a more standard situation, posing similar problems as privatisation of state-owned companies in the advanced market economies. As to the future prevailing model of corporate governance, the Czech Republic can be expected to converge toward the practice which will be most widely observed within the European Union countries. Macroeconomic stabilisation The transformation strategy required a constant effort to achieve macroeconomic stabilisation. Tight fiscal policy, based on a balanced or surplus state budget, and prudent monetary policy, were mutually supporting each other. These were supplemented by wage controls and overall income policy within the so-called heterodox concept of macroeconomic stabilisation. During transformation, Czech monetary policy used two basic tools to fight inflation: targeting monetary aggregates, and the nominal anchor of a fixed exchange rate. The Czech experience with curbing inflation during a transformation period is successful, compared to other transforming economies of Central Europe. When, in January 1991, the bulk of prices in the Czech economy were freed after 40 years of central price fixing, the result was a yearly increase of the price level by almost 58%. However, no inflationary spiral evolved, and, since 1992, inflation showed a falling long-term trend towards a single digit rate in 1995-1996. BIS Review 25/1997  -5-  The initial jump of prices in 1991 was not accompanied by a similarly steep increase of nominal wages. Instead, real wages fell. That created some room for subsequent increases in real wages without serious inflationary consequences.

A more detailed answer to the causes of changes in the degree of impact of individual factors on money supply growth can be found when studying their development in different periods of the transformation. In Czechoslovakia, during the first transformation years (1990-1992) money supply growth was based primarily on the relatively quickly increasing volume of credits granted to enterprises due to growing credit demand, which was very closely connected with the BIS Review 25/1997  -9-  liberalisation of entrepreneurial activities in a newly created market environment (an increasing number of businesses in need of initial capital). Gradually, foreign money creation also expanded, affected by the development of an improving balance of payments, particularly the current account. The gradual stabilisation of the macroeconomic and political environment (apparent mainly after the dissolution of the Czechoslovak Federation in January, 1993, and the relatively rapid calming of price developments following the introduction of a new tax system based on value added tax), the commencement of the activities of capital market institutions and the stability of the exchange rate which significantly decreased the risks for foreign investors, led in the second half of 1993 to a significant strengthening of the influence of the inflow of foreign funds into the Czech Republic on money supply growth. The strong foreign capital inflows continued to influence money supply growth in 1994 and 1995 when capital inflows reached 18 per cent of GDP. This growth was particularly generated by increasing foreign direct investments, portfolio investments and relatively cheaper foreign credits drawn by domestic enterprises.