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

  • Christos Papazoglou

    ()

    (Bank of Greece, Economic Research Department)

  • Eric J. Pentecost

    (Department of Economics, Loughborough University)

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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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
Contact details of provider: Web page: http://www.bankofgreece.gr

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  1. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  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. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September.
  4. Jacob A. Frenkel & Guillermo Calvo, 1991. "From Centrally-Planned to Market Economies; The Road from CPE to PCPE," IMF Working Papers 91/17, International Monetary Fund.
  5. Joannes Mongardini & Johannes Mueller, 1999. "Rachet Effects in Currency Substitution; An Application to the Kyrgyz Republic," IMF Working Papers 99/102, International Monetary Fund.
  6. 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.
  7. Ashok Kumar Lahiri, 1991. "Money and Inflation in Yugoslavia," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 751-788, December.
  8. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis," NBER Working Papers 0832, National Bureau of Economic Research, Inc.
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