Central European Economies in the Aftermath of the Russian Payments Crisis

Economic reforms in Central European transition economies (TEs) have strengthened the institutional framework of their financial system and made them less vulnerable to contagion effects of world financial crises. They have been able to resist relatively well the negative pressures on their currencies and financial markets induced by the Russian crisis of August/September 1998. But they are still perceived as the emerging market economies since their economic transformation from a command to a free market system is hardly completed. A further institutional advancement of the financial system, improvements in corporate governance, and the pursuit of a more transparent, forward-looking stabilization policy are still among the key future tasks, completion of which will undeniably contribute to immunity of these countries to future world financial crises. This chapter examines the consequences and the macroeconomic policy responses in Poland, Hungary and the Czech Republic to the Russian financial crisis. The analysis concentrates on contagion effects of the Russian payments moratorium and the subsequent wave of corrections in emerging financial markets, rather than on long-run spillover effects on Central European real gross domestic product (GDP). Various indicators that are believed to reflect the degree of vulnerability of TEs to financial contagion are reviewed. The chapter further argues that more transparent macroeconomic policies are helpful for generating signals of financial stability to world financial markets, thus strengthening resilience to financial contagion. It points to the inflation-forecast targeting monetary policy coupled with flexible exchange rates, such as currently applied in the Czech..