Question

Hyperinflation: After the collapse of central planning, transition economies experienced cases of hyperinflation. Explain why this occurred.

Answer 1

Answer:

All three of the transition economies have made
p ro g ress in creating a banking system that corre s -
ponds to the needs of a developed market economy.
Their central banks have considerable independence
f rom government influence in fo l l owing their man-
dates to control inflation and maintain the inter-
national value of their curre n cy. At the same time,
the commercial banking sector remains re l a t i ve l y
f ra g i l e, plagued by poor loans made in the past as
well as by questionable lending policies that, fo r
some banks, continue to the present. These pro b l e m s
a re most visible in the Czech Re p u b l i c, but even in
Poland and Hungary loan portfolios of individual com-
m e rcial banks remain pro b l e m a t i c. This weakness of
the commercial bank secto r, and its re l a t i vely small
role in financing the investment activity of the corpo-
rate secto r, limits the policies that central banks can
fo l l ow and may attenuate or distort the tra n s m i s s i o n
of monetary policy impulses to the economy.
The problems created by the fragility of the
commercial bank sector are exacerbated by the
underdevelopment of the other components of
the capital market. Each of the countries has a
stock exchange, but markets for shares are thin,
and stock markets have performed poorly since
the middle of the decade.