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The Real Exchange Rate in Transition Economies

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  • Grafe, Clemens
  • Wyplosz, Charles

Abstract

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.

Suggested Citation

  • Grafe, Clemens & Wyplosz, Charles, 1997. "The Real Exchange Rate in Transition Economies," CEPR Discussion Papers 1773, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1773
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    More about this item

    Keywords

    foreign financing; Real Exchange Rate; Transition; Wage Gap;
    All these keywords.

    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, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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