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. Labour 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 labour market distortions and foreign financing.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1773.
Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F35 - International Economics - - International Finance - - - Foreign Aid F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes
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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.
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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