In general, the main sources of money supply growth include money issued in the form of credits granted by banks to both households and enterprises in domestic currency, the conversion of foreign exchange inflows into domestic currency (net foreign assets), net credit to the government and the net position of the National Property Fund and the residual called “other items net” (mainly own capital and bank reserves). Developments in the period 1993-1996 reveal some interesting features: Credits to enterprises and households in domestic currency, which are quite naturally the main source of money supply, exhibited a relatively slower growth up to the end of 1995, followed by a relatively quicker growth in 1996 when these credits became the main impetus of money supply growth. The most remarkable feature was the growing share of net foreign assets up to December 1995 which resulted especially in 1993-1995 in the deviations of the dynamics of M2 out of the corridor laid down by monetary policy and which gave rise to the sterilisation efforts of the CNB. The influence of net credit to the government plus the net position of the National Property Fund was negligible in the period under analysis, and in some periods it even dampened money supply growth. This fact is probably unique in the transforming countries of Central and Eastern Europe and reflects the prudent fiscal stance of Czech macroeconomic policy.
Even with microeconomic restructuring going on, unemployment is not expected to exceed a 4 % level in the near future. Monetary policy tools In a command type economy, monetary policy reflected state plans expressed mainly in physical terms. Planned direct credit allocation was linked to the planned growth of national income. Credits to enterprises were directly allocated, with little attention paid to the creditworthiness of the borrowing enterprise. Risk was socialised due to the existence of a unitary banking system. The introduction of a new Central Bank Act and a new banking law in late 1989 marked the beginning of the development of a market-oriented banking system. The Act laid the basis for establishing a two-tier banking system through the separation of the central bank and commercial banking functions and provided the central bank with the means for conducting monetary policy and with regulatory authority over banks. The latter established the legal basis for a universal banking system. The separation of central banking from commercial banking was put into effect on January 1, 1990. The dissolution of the Czechoslovak Federation into two independent republics on January 1, 1993, meant the creation of the Czech National Bank (CNB). According to the Act, the CNB is independent of any instructions given by the government. The CNB is obliged to submit to the Parliament a report on monetary development at least two times a year and to inform the general public on monetary development at least once every three months.