The Czechoslavak Monetay Union

Despite the problems, Slovakia has experienced some considerable advance in the main economic indicators, during the period of 1993-2003. (www. sario. sk) After a decline in GDP by 23% during the federation with Czech Republic, GDP grew annually by an average of 5. 9% throughout the 1994-1997, 4. 1 in 1998 and slower growth average of 2% during 1999-2001. (www. sario. sk)

Unemployment, which had reached two peaks levels, the first one during 1994-1995 about 14.5%, declined as a result of fast economic activity and fiscal spending, and between 1997-98 had stabilized at a level of 12% of the labor force. (www. sario. sk) The second peak remains even to this day starting in 1999 about 15. 6% and during 2000-2002 around 18%. (www. sario. sk) Inflation dropped from 23% in 1993 to below 10% in 1995 and to about 6% during 1996-1998, peaked in period of 1999-2000 average 11%. As a result of tight monetary policy introduced by the new government the inflation fell to 7. 3% in 2001 and in 2002 reached the historic minimum of 3.3 %. ( www. sario. sk)

A brief description of what happened in numbers was made as a preparation to detailed examination. Why such

a sharp falls and grows occurred, is a question that has to be further investigated from primarily political, economical, and social perspective. Firstly the development of inflation in Slovakia during 1993-2002 will be discussed. As the former union dissolved, the Czechoslovak Monetary Union was breaking up as well and the National bank of Slovakia (NBS) was established replacing the Czechoslavak Monetay Union.

NBS purpose is to control the infaltion, preform the monetary policy if needed, set the interest rates and other important things. Inflation has never been a big problem. In 1993, the inflation reached one of its two peaks and has gone up to almost 23. 3%. This was mainly caused by a taxation measure, where Slovakia had to make a transformation from a turnover tax to VAT. The regime of internal convertibility, a fixed exchange rate with limited fluctuation and devaluation of Slovak crown were some of the main factors driving inflation up in 1993.

In addition, tax reform, administrative devaluation, indirect taxes, agricultural production, and core inflation, which had increased because of several applied measures (tax reform, devaluation) and arrived at the uppermost values almost 10%, helped to increase the inflation rate as well. Plus the 10% core inflation can be characterize as with soaring autonomous component of inflation, high inertia, exposed to high inflatory and dissimulator impulses meaning greater instability. The regime of internal convertibility ended in 1995, when current account convertibility was successfully applied within the system.

The inflation was 13. 4% in 1994, and 9. 9 in 1995. (www. sario. sk) National Bank of Slovakia handled to stabilize the inflation development, and following the declaration of current account convertibility, to lower its autonomous component. The releasing of the exchange rate regime (and supplementary aspects) appeared to have pressed up inflation instability. In the whole, the inflation progression on the other hand contained lesser height of core inflation, which had dropped dropped to 5. 6 in 1994. (www.sario. sk)

The overall period has been underlined by a soaring autonomous component, and high sluggishness. For the moment, the remaining instability of the inflation process has been, even if ignoring constant deregulation, moderately high. Although the exchange rate regime remained fixed until 1998, during the period of (1995-1998), the period when no major administrative decision with an impact on prices was put into practice (deregulation was virtually stopped) and core inflation stood at relatively low level.

The instability band for the exchange rate movements was prolonged, having inflation rate at 5, 8% in 1996, 6, 1 in 1997, and 6, 7 in 1998. (www. sario. sk) but due to a deepening foreign trade deficit, which happened because of Meciar’s massive government spending, devaluation pressures started to build up until it broke out in December 1998. The whole economy however prosperous by numbers was actually a ticking bomb. The period of 1998 is marked by a lower level of the autonomous component of inflation and declining instability of the inflation process.

However, have some negative factors as quite high inertia, which may threaten the inflation process and, particularly, further disinflation activities. There were also some pressures increasing the inflation as adjustment to change indirect taxes, deregulation, import surcharge (7%) and especially lowering VAT’s (value added tax) rates in 1999. In 1998, beyond a regime of supervised floating rate has been introduced in order to decrease the core inflation, which was partially successful, except the end of 1999, when actions that were a part of the stabilization package were transformed into core inflation.

Inflation was stabilizing at present; core inflation is descending when compared to the history of independent Slovakia. In 1998 the inflation was relatively low 6, 7%, but due to accumulated budged deficit and devaluation pressures in 1999, inflation got up to 10, 6%. (www. sario. sk) Gradually increasing and peaking in 2000 about 12, 0% and due to stabilization package, it has gone down to 7, 3% in 2001 and record inflation in 2002 about 3, 3% as a result of tight monetary policy.

(www. sario. sk) NBS effectively conducted disinflation policy making LR (a value that the core inflation would reach if not affected by other internal of external elements) to drop form 7. 5% to 4. 9%. The whole process had high autonomous component, high inertia, and volatility slightly changed. There are 3 factors that will take part in inflation process in future and with which the NBS will have to deal: 1st the progress of core inflation .