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The real exchange rate in transition economies

Grafe, Clemens and Wyplosz, Charles (1998) The real exchange rate in transition economies. CEPDP, 395. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

Real exchange rates appear to present a specific behaviour in the early phase of transition: they are largely unaffected by nominal exchange rate movements and exibit trend appreciation. The model presented here describes the transition process as the emergence of two new (traded and non-traded good) sectors and the decline of an inefficient and subsidised state sector. The absence of financial markets means that firms accumulate capital through retained earnings. Labour markets are imperfect giving rise to a wage gap. The model shows that the real exchange rate plays the crucial role of determining real wages. Through real wages it sets the pace for the development of the new sectors as workers are attracted out of the state sector. The link between growth and real appreciation differs from the usual Balassa Samuelson effect. The paper also explores the role of labour market distortions and foreign financing.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 1998 the authors
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 395
Date Deposited: 31 Jul 2008 14:03
URL: http://eprints.lse.ac.uk/20268/

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