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. 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. in 1995 and 1996, however, the growth of real wages, which - if aggregated over all sectors - was faster than the increase in productivity, became one of the potential inflationary dangers. the nominal anchor of the fixed exchange rate played an important role in the relatively good czech results in fighting inflation. instead of repeated smaller devaluations as in poland or hungary, the czech republic used a combination of a large initial devaluation and a subsequently fixed nominal exchange rate. in 1990 - before the start of the full transformation programme - the currency was devalued by more than 50 %. that subsequently enabled us to keep the nominal exchange rate stable for five years. after the introduction of a wider 7. 5 % fluctuation band in 1996, the exchange rate is within the band. transformation involved so much fundamental change that its start inevitably led to an initial fall of output and gdp. however, part of the former higher output level was simply feeding the enormous waste which went on throughout the command economy. in 1993, gdp stagnated partly due to the split - up of czechoslovakia. economic growth was resumed in the czech republic in 1994 and continued in 1995 and 1996 as a fast growth period. unemployment has been kept low during the whole transformation period, thanks mainly to the rapid emergence of new private firms, and a large shift of labour into the previously underdeveloped service sector. even with microeconomic restructuring going on, unemployment is not expected to exceed a 4 % level in the near future. monetary policy tools in a command type economy, monetary policy reflected state plans expressed mainly in physical terms. planned direct credit allocation was linked to the planned growth of national income. credits to

mojmir hampl : monetary policy and the current macroeconomic environment in the developed world speech by mr mojmir hampl, vice governor of the czech national bank, at the deutsche bank prague client conference, prague, 25 october 2016. * * * ladies and gentlemen, good afternoon. thank you very much for inviting me again to your flagship event. it is my utmost pleasure to be here. actually, this is the third time in a row i have had the chance to speak here. in 2014 my topic was, quite expectedly, the exchange rate commitment and its introduction in november 2013. i recently looked at my slides from 2014, and i would not change anything about them. only the timing of the exit has changed – quite radically, i have to admit. the following year, 2015, the obvious topic was a comparison of the czech and swiss cases. this was especially interesting given the abrupt and completely surprising swiss exit from their exchange rate commitment in january 2015. i thought to myself : “ what would be a natural candidate for this year? ” i put my mind to work and suddenly a topic appeared : our own czech exit, our own way of abandoning the exchange rate commitment, which is almost three years old now. however, i somehow feel that the exit will be a key topic for your questions and comments. so, i eventually decided to speak about something else, something more abstract and may be a bit more general : the constraints on monetary policy in the developed world. as i see the czech republic a part of the developed world, i believe this is a topic that is relevant to the czech national bank. the key constraint or dilemma – or even puzzle, if you will – for us in the central banking community has been one key real variable which we believe is beyond the reach of central bankers. that variable is the real equilibrium, or natural, interest rate. we believe that this variable is absolutely key for the economy and that it is exogenous ( i. e. not in hands of anybody, or at least not central bankers ). at the same time, it critically influences both the financial sector and the real economy. i have tried to depict what i want to say on this very stylised chart ( chart 1 ). chart 1 : the role of the equilibrium interest rate 1 / 5 bis central bankers'speeches it basically shows that if you have got the natural real equilibrium interest rate at a certain level – and, of course, it is not directly