Macroeconomic policy,output, and inflation in the former Czechoslovakia: Some evidence from the VAR analysis

Both macroeconomic policy and structural adjustment factors influenced the dynamics of output and inflation in the former Czechoslovakia during the first phase of its transition from central planning to markets. The results of VAR analysis indicate that, following price liberalization, the impact of structural adjustment processes on the level of output was somewhat stronger than the impact of macroeconomic policy. Moreover, it seems likely that a "looser" macroeconomic policy—advocated by many as a countermeasure to a large decline in industrial production—would only worsen the situation, bringing both higher inflation and a larger decline in industrial production.