The real exchange rate in transition economies

Clemens Grafe and Charles Wyplosz

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 24 pages
Date: 1998-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://eprints.lse.ac.uk/20268/ Open access version. (application/pdf)

Related works:
Working Paper: The Real Exchange Rate in Transition Economies (1998)
Working Paper: The Real Exchange Rate in Transition Economies (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:20268

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