This paper aims at formulating some basic principles of optimum exchange rate policy during the process of transformation of Czechoslovak economy into a modern market economy. Three basic issues are discussed: a) Determinants of the rate of exchange. Essentially, there are two basic opinions on this issue. The balance of payments' theory sees the immediate cause of exchange rate changes in the interaction of supply and demand for foreign currencies, reflected in the country's balance of payments. The exchange rate acts as an "equilibrium price", balancing supply and demand. The Purchasing-power-parity theory sees the decisive factors determining the exchange rate in price relations. Price factors influence the exchange rate depending on the extent to which national goods, and their prices, are actually being compared with those of other economies. It is a relation based on a certain average of price relations of a bundle of goods. The rate of exchange is not, and cannot be, determined exclusively by factors described in the first or second group of determinants. First, it is to be noted that the exchange rate, its trends, oscillations and fluctuations, reflect the transfer of values in the broadest sense, between the national economy and its environment; it reflects international economic relations where, in addition to commodity, price, and capital factors other economic and extra-economic factors also play a role. Many discussions disregard some of the main determinants of the exchange rate. They either exaggerate the influence of the exchange rate on external equilibrium, without taking into account its impact on internal relations within the economy. Or, on the contrary, they regard the exchange rate only from the point of view of conditions of internal equilibrium. b) Economic policy and the rate of exchange. The exchange rate plays a decisive role in choosing a definite macroeconomic strategy, as a basis for economic policy. In many discussions, Czechoslovak economists have expressed two basic views. In my opinion, the shock variant is all too often criticized, as compared to the gradualist variant. It is to be realized that in a monopolistic, bureaucratic economic structure, no gradual process can guarantee that long-term adaptive processes of economic agents will be initiated. Under gradualism, economic agents have a chance that the speed of hardening of the climate can go down; also, the whole process would be accompanied by vast bureaucratic activites going against the philosophy of the market economy. Though the macroeconomic measures presently taken are of immense importance, the exchange rate stabilization depends on a gradual increase of performance of enterprises - reflected in their value-adding activities. Genuine adaptation of enterprises to world labour productivity standards is the only solution. Also, activization of national capital is needed, and creation of a strong pressure (a "life necessity") to become an entrepreneurial subject. That, together with a fast progress in the legislative field (especially in asserting the transformation law) could increase the inflow of foreign capital, which is decisive for a qualitatively higher level of comparative advantage, and of structural change. Economic policy requires, and includes as its parameter, a trend toward a realistic, equilibrium rate of exchange - to make comparative advantages, and price structures within the economy, transparent. c) Macroeconomic regulation, and exchange rate stability. A natural endeavour to stabilize all the conditions and parameters of the national economy is reflected also in the tendency to fix the key "price" of the domestic economy - the exchange rate of the currency. Its certain stability affects positively all the internal economic processes, and creates a good climate for an inflow of "solid" (not only speculative) capital from abroad. But anxious attempts to stabilize or fix the exchange rate often are not the best solution, as they in practice lead to use of mere administrative measures. Here too, the market economy requires a market solution, based on a flexible exchange rate, which can best, and very adaptively, react to basic results of economic policy - mainly to the volume structure of aggregate demand. Paradigms are discussed showing the effects of macroeconomic policy - namely, fiscal and monetary restriction - in case of an administratively fixed exchange rate. Internal and external equilibrium cannot be achieved by a mere (one-sided) restriction of expenditures; it is necessary also to devaluate the currency. In trying to stabilize the exchange rate, or avoid its large fluctuations, it is very important, and efficient, to influence the volume and structure of aggregate demand - which affects also so the demand for foreign currencies. This involves the use of well-known tools of monetary and fiscal policy. In addition to these tools, specific regulatory measures can be used, such as foreign currency intervention, foreign trade policy, economic surveillance operations by the state (price, wage, foreign currency regulation, trade restrictions), and anti-monopolistic regulation. Not only the world capital market is an important field for stabilization and regulation of the exchange rate: also, it is crucial to foster all forms of finacial markets (money, capital, and foreign currency market) in the domestic economy. In my opinion, discussions of disequilibrium in the Czechoslovak economy overestimate the role of demand restriction; this tool is also used as a macroeconomic stabilizer of the exchange rate. The same starting points are ascribed to the authors of the Polish economic reform J. Sachs and D. Lipton, whose ideas provided the platform also for the Czechoslovak reform. The paper argues in detail that such application of theoretical and model results of J. Sachs and D. Lipton is not correct.
