Abstract

The Czech Republic’s recent history of economic transition is sure to attract attention from any researcher interested in the topic of boom-bust patterns of capital flows. The mid-1990s was a period of massive capital inflows into the country. Net capital inflow as a share of GDP reached 8.5 percent in 1994 and peaked at a record level of 16.6 percent one year later. During this same period official external reserves increased from almost zero at the beginning of 1993 (after the breakup of Czechoslovakia) to $14 billion at the end of 1995. The share of net foreign assets as a component of the change in the money supply almost doubled from 45 percent in 1993 to 80 percent in the last quarter of 1995. In the first quarter of 1997 the Czech economy was exposed to a new wave of capital inflow in the form of Eurobond issues valued at an astonishing $1.7 billion. The exchange rate reacted with a sharp appreciation, just as the current account deficit was widening sharply.