The Political Economy of Macroeconomic Developments, Central Bank and Tax System

Estonia has made significant progress in the liberalisation of the economy and in macroeconomic stabilisation during the last years of economic transition. Tight monetary and fiscal policies have been the main factors of the macroeconomic stabilisation, and there are some important signs concerning the early stages of economic recovery. Some precautionary remarks include: a rapidly increasing trade balance deficit, high inflation, problems with collecting budgetary revenue, tax avoidance (and great tax arrears), the deepening of economic inequality, and increased political pressure by various interest groups to change successful economic policies. The currency board system with a pegged exchange rate regime is the corners tone of Estonian monetary policy. Some empirical results of the Estonian commercial banking systems performance is analysed and presented in the paper. For example, there was an overall decline in market-determined interest rates and the interest rate spread decreased substantially over the last year.