Description
During the COVID-19 crisis, emerging economies have followed advanced economies in providing the necessary monetary and fiscal policy support to achieve economic stabilisation and recovery. According to the literature, emerging economies find themselves in a subordinate position in relation to the global financial system and thus their central banks have a more restricted repertoire of monetary policy tools at their disposal. How can we then explain the Hungarian MNB and the Polish NBP’s successful launch of large-scale asset purchases, including government bonds, without triggering capital flight and increasing risk premia for investors? Moreover, while the Czech lawmakers legislated to give the necessary legal mandate to the Czech CNB to replicate these tools, the CNB has so far shied away from unconventional monetary tools. In this paper, we will argue that (1) the crisis situation has created favourable conditions for emulation of advanced economies and experimentation with monetary policy in emerging markets, and that (2) institutionalised fiscal discipline adherence was a key prerequisite for maintaining credibility in eyes of bond investors. To explain the variation in the three cases, and to account for the unwillingness of the Czech CNB to join the chorus, we focus on the extent of fiscal-monetary coordination in each country. Whereas that coordination has become stronger in recent years under the populist nationalist governments in Hungary, and since the pandemic also in Poland, the strict interpretation of the central bank’s mandate in Czechia points towards a fiscal-monetary mismatch and continuing conservative approach in Czech monetary policy.
