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.
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Philippe Aghion & Olivier J. Blanchard, 1994.
"On the Speed of Transition in Central Europe,"
NBER Chapters,
in: NBER Macroeconomics Annual 1994, Volume 9, pages 283-330
National Bureau of Economic Research, Inc.
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Atkeson, Andrew & Kehoe, Patrick J, 1996.
"Social Insurance and Transition,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 377-401, May.
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