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The Dynamic Adjustment of a Transition Economy in the Early Stages of Transformation

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  • Christos Papazoglou

    ()
    (Bank of Greece, Economic Research Department)

  • Eric J. Pentecost

    (Department of Economics, Loughborough University)

Abstract

This paper develops a model of a representative transition economy to explain the stylised facts of output declines and real exchange rate appreciation in the early stages of transformation. These facts can be explained by supply-side shocks, interest rate liberalisation or a reduction in core inflation. The policy implication is that price liberalisation in advance of financial liberalization and structural reform, including widespread privatisation of the production process, necessarily results in some temporary loss of output.

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File URL: http://www.bankofgreece.gr/BogEkdoseis/Paper200303.pdf
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Bibliographic Info

Paper provided by Bank of Greece in its series Working Papers with number 03.

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Length: 20 pages
Date of creation: May 2003
Date of revision:
Publication status: Published in Journal of Macroeconomics, 2004, 26 (3), pp.547-561
Handle: RePEc:bog:wpaper:03

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Web page: http://www.bankofgreece.gr
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Related research

Keywords: Transition dynamics; overshooting; competitiveness; output decline;

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References

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  1. Joannes Mongardini & Johannes Mueller, 1999. "Rachet Effects in Currency Substitution - An Application to the Kyrgyz Republic," IMF Working Papers 99/102, International Monetary Fund.
  2. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
  3. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis," NBER Working Papers 0832, National Bureau of Economic Research, Inc.
  4. Martin Uribe, 1995. "Hysteresis in a simple model of currency substitution," International Finance Discussion Papers 509, Board of Governors of the Federal Reserve System (U.S.).
  5. Eduardo Borensztein & Dimitri G. Demekas & Jonathan D. Ostry, 1993. "An Empirical Analysis of the Output Declines in Three Eastern European Countries," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 1-31, March.
  6. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
  7. Ashok Kumar Lahiri, 1991. "Money and Inflation in Yugoslavia," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 751-788, December.
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Citations

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Cited by:
  1. Hondroyiannis, George & Lazaretou, Sophia, 2004. "Inflation persistence during periods of structural change: an assessment using Greek data," Working Paper Series 0370, European Central Bank.
  2. Dimitrios Sideris, 2004. "Testing for Long-Run PPP in a System Context: Evidence for the US, Germany and Japan," Working Papers 19, Bank of Greece.
  3. Nicholas G. Zonzilos, 2004. "Econometric Modelling at the Bank of Greece," Working Papers 14, Bank of Greece.
  4. Christos Papazoglou, 2005. "Real Exchange Rate Dynamics and Output Contraction under Transition," Working Papers 29, Bank of Greece.
  5. Eleni Angelopoulou, 2005. "The Comparative Performance of Q-type and Dynamic Models of Firm Investment: Empirical Evidence from the UK," Working Papers 27, Bank of Greece.
  6. Granville, Brigitte & Mallick, Sushanta, 2006. "Does inflation or currency depreciation drive monetary policy in Russia?," Research in International Business and Finance, Elsevier, vol. 20(2), pages 163-179, June.
  7. Moore, Tomoe & Pentecost, Eric J., 2006. "An investigation into the sources of fluctuation in real and nominal wage rates in eight EU countries: A structural VAR approach," Journal of Comparative Economics, Elsevier, vol. 34(2), pages 357-376, June.
  8. Granville, Brigitte & Mallick, Sushanta, 2010. "Monetary Policy in Russia: Identifying exchange rate shocks," Economic Modelling, Elsevier, vol. 27(1), pages 432-444, January.
  9. George A. Christodoulakis & Stephen E Satchell, 2006. "Exact Elliptical Distributions for Models of Conditionally Random Financial Volatility," Working Papers 32, Bank of Greece.

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