The Real Exchange Rate in Transition Economies

CEPR Discussion Paper Series No. 1773

Posted: 5 Aug 1998

See all articles by Clemens Grafe

Clemens Grafe

University of London, Birkbeck College - Department of Economics

Charles Wyplosz

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR)

Date Written: December 1997

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 exhibit 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 subsidized state sector. The absence of financial markets means that firms accumulate capital through retained earnings. Labor markets are imperfect giving rise to a wage gap. The model shows that the real exchange 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 labor market distortions and foreign financing.

JEL Classification: F31, F35, F41, O33

Suggested Citation

Grafe, Clemens and Wyplosz, Charles, The Real Exchange Rate in Transition Economies (December 1997). CEPR Discussion Paper Series No. 1773, Available at SSRN: https://ssrn.com/abstract=112588

Clemens Grafe (Contact Author)

University of London, Birkbeck College - Department of Economics ( email )

Malet Street
London WC1E 7HX
United Kingdom

Charles Wyplosz

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5946 (Phone)
+41 22 733 3049 (Fax)

HOME PAGE: http://heiwww.unige.ch/~wyplosz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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