Exchange Rate Policy and Output Growth: The Experience of the Transition Economies of Central and Eastern Europe
This article examines the contribution of exchange rate policy to output growth in the transition economies of Central and Eastern Europe. The analysis identifies two major channels through which the exchange rate affects output. The first is the direct effect which operates on output through its impact on international price competitiveness. The second channel, the indirect one, relies on the close association between disinflation and growth in these countries. That is, to the extent that the exchange rate policy has contributed to lower inflation in these countries it has indirectly caused higher economic growth. The experience of these economies as well as the results of a preliminary empirical analysis strongly suggest that both channels are very important to output growth. In addition, the analysis indicates that a fixed exchange rate regime during the transition process may serve the growth objective better since, to the extent that it is more effective in reducing inflation, it exerts a positive influence on output growth through the direct channel as well.
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Volume (Year): 11 (1999)
Issue (Month): 3 ()
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