Microsoft Word Thesis Gent (1). doc

Figure 8. Credit growth and money supply in credit market 
Source: Czech National Bank, 2000 
 

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3.3 Stream of credit market and causes of credit concentration in 
Czech Republic 
The transition phase that Czech Republic went through improved its credit market 
because the demand for credit increased, while with time passing the lending activity 
improved as well. During the transition phase the Czech Republic government aimed to 
privatize the public capital. This increased further the demand for credit by enormous 
investors and businesses. Lending to these investors was a benefit to Czech economy as 
it increased the flow of foreign capital in a short-term period. Furthermore, an 
advantage to make Czech banks more profitable and increase their source of credit was 
as a result of foreign lower interest rates. Rapid increase of wages, consumption and 
overall welfare improvement affected the growth of aggregate demand for credits.
Even though, the increased demand for credit and improved lending was a benefit, there 
were also some consequences related to it. The immediate increase demand for credits 
meant that the country will have more credit risk; more deficit and this also brought the 
monetary crises in the economy in early 1997, (Vodova, 2003). The problems related to 
the monetary policy indicated that the Czech credit market was going through financial 
crises. 
Economic growth and investments mostly are financed by capital inflows, which are 
interconnected to demand and consumption; both factors that put pressure on prices. In 
credit market, credit expansions were covered by foreign capital inflows and this was 
one of the causes that influenced in monetary aggregate by making monetary policy 
more complex. Increase in foreign exchange reserves made the development of nominal 
fixed exchange rate more complicated. Growth in intermediate money (M2) was the 
largest during 1994-1995. The growth of M2 is correlated to the increased inflow of 
foreign capital at fixed exchange rate. Furthermore, at the same time the real GDP 
reached its highest level since the beginning of transition period in Czech Republic, 
(Hampl & Matousek, 2000). 

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