Dilemma of the Czech National Bank: Factors of Adverse Macroeconomic Development in Czechia

Abstract

This chapter elaborates on the main factors of the adverse macroeconomic development in Czechia and Europe. Currently, i.e. from 2022, Czechia mainly suffers from double-digit galloping inflation and GDP stagnation. The aim of this chapter is to identify and describe the influence of the main factors from the present and the more distant past on current inflation and approaching stagflation in Czechia. This chapter analyzes an unfavourable mix of demand and supply factors that leave the new banking board of the CNB facing a dilemma, that is, whether to pursue a disinflationary policy of increasing interest rates and thus push the Czech economy closer into recession or to rely on demand-driven economic growth, which will keep unemployment at a low level, but at the same time contribute to inflationary pressures. The new governor of the CNB completely changed the strategy of his predecessor and, despite strong criticism, did not raise interest rates even once. Based on the analysis of inflationary factors, this chapter tries to explain the motives for the Central Bank's new strategy in the fight against inflation, which is the systematic appreciation of the Czech koruna.

Citation

Rozmahel, P. and Litzman, M. (2024), "Dilemma of the Czech National Bank: Factors of Adverse Macroeconomic Development in Czechia", Stavárek, D. and Tvrdoň, M. (Ed.) Modeling Economic Growth in Contemporary Czechia (Entrepreneurship and Global Economic Growth), Emerald Publishing Limited, Leeds, pp. 87-101. https://doi.org/10.1108/978-1-83753-840-920241006