Monetary Policy in the Czech Republic and EMU Accession

This article discusses monetary policy issues that arise in connection with the expected entry of the Czech Republic into the EMU. The paper first discusses the disinflation path specified in the Czech National Bank?s (CNB) long-term monetary strategy, and the quantification of inflation corresponding to price stability.Considered next is the issue of what room exists for price level convergence between the Czech Republic and the euro area in the period before and after EMU membership, either by means of a higher rate of inflation or by means of a nominal appreciation of the Czech koruna. The author concludes that the CNB?s long-term inflation target, and institutional constraints regarding prices and nominal exchange rate movements in the period before joining the EMU, should not seriously limit the possibility of price level convergence.Lastly, the author briefly describes the mutual compatibility of the Maastricht criteria under the condition of the rapid growth of labor productivity. During the pre-accession EU period, and during ERM II membership, nominal exchange rate flexibility will be sufficiently large to absorb any inflationary effects related to the relatively high growth of labor productivity.