Abstract
This paper develops a simple theoretical model of exchange rate determination in a transitional economy. The distinguishing feature of the model is the retention of market failures pertaining to the production and consumption of nontradable goods and, therefore, the likelihood of real exchange rate appreciation. Using this framework, the econometric tests are performed for the Czech Republic, Slovenia, Poland, and Hungary, and appropriate macroeconomic and exchange rate policies are recommended to support further liberalization and development of the foreign exchange market.
Similar content being viewed by others
References
Allen, P. R.; Stein, J. L. "The Dynamics of Real Exchange Rate, Capital Intensity, and Foreign Debt," working paper, 1989.
Bayoumi, T.; Clark, P.; Symansky, S.; Taylor, M. "The Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies," in J. Williamson, ed.,Estimating Equilibrium Real Exchange Rates, Washington, DC: Institute for International Economics, 1994.
Blanchard, O.; Froot, K. A.; Sachs, J. D.The Transition in Eastern Europe, Chicago, IL: University of Chicago Press, 1994.
Brada, J. C.; Hewett, E. A.; Wolf, T. A.Economic Adjustment and Reform in Eastern Europe and the Soviet Union, Durham, NC: Duke University Press, 1988.
Dinopoulos, E.; Lane, T. D. "Market Liberalization Policies in a Reforming Socialist Economy,"International Monetary Fund Staff Papers, 39, 3, June 1992, pp. 456–94.
Dornbusch, R. "Tariffs and Nontraded Goods," in R. Dornbusch, ed.,Exchange Rates and Inflation, Cambridge, MA: MIT Press, 1988.
Dutton, M.; Strauss, J. "Cointegration Test of Purchasing Power Parity: The Impact of Nontraded Goods,"Journal of International Money and Finance, 16, 3, 1997, pp. 433–44.
Edwards, S.Real Exchange Rates, Devaluation, and Adjustment, Cambridge, MA: MIT Press, 1991.
Elbadawi, I. E. "Estimating Long-Run Equilibrium Real Exchange Rates," in J. Williamson, ed.,Estimating Equilibrium Real Exchange Rates, Washington, DC: Institute for International Economics, 1994.
Flanagan, R. J. "Wage Determination and Incomes Policy During Economic Transformation in Eastern Europe," in H. Herr; S. Tober; A. Westphal, eds.,Macroeconomic Problems of Transformation: Stabilization Policies and Economic Restructuring, Brookfield, VT: Edward Elgar, 1994.
Golinelli, R.; Orsi, R. "Exchange Rate, Inflation, and Unemployment in East European Economies: The Case of Poland and Hungary,"Economics of Planning, 31, 1998, pp. 29–55.
Grosfeld, I.; Nivet, J. F. "Wage and Investment Behavior in Transition: Evidence from the Polish Panel Data Set," discussion paper, 1726, Center for Economic Policy Research, November 1997.
Grubacic, S. "The Role of Real Exchange Rates in Macroeconomic Adjustment: Theory and Evidence from Eastern Europe," Ph.D. thesis, University of Connecticut, 1996.
Halpern, L.; Wyplosz, C. "Equilibrium Exchange Rate in Transition Economies,"International Monetary Fund Staff Papers, 44, 4, December 1997, pp. 430–61.
Krajnak, K.; Zettelmeyer, J. "Competitiveness in Transition Economies: What Scope for Real Appreciation,"International Monetary Fund Staff Papers, 45, 2, June 1998, pp. 309–62.
McKinnon, R.The Order of Economic Liberalization: Financial Control in the Transition to Market Economy, Baltimore, MD: Johns Hopkins University Press, 1991.
Officer, L. "The Purchasing Power Parity Theory of Exchange Rates: A Review Article,"International Monetary Fund Staff Papers, 23, 1, 1976, pp. 1–60.
Orlowski, L. T. "Exchange Rate Policies in Central Europe and Monetary Union,"Comparative Economic Studies, 40, 3, 1998, pp. 58–78.
Rodrik, D. "Foreign Trade in Eastern Europe's Transition: Early Results," in O. Blanchard; K. A. Froot; J. D. Sachs, eds.,The Transition in Eastern Europe, Chicago, IL: University of Chicago Press, 1994.
Rosati, D. "Exchange Rate Policies During Transition from Plan to Market,"Economics of Transition, 4, 1, 1996, pp. 159–84.
Rossati, D. K. "Endogenous Budget Deficit During Transition," in H. Herr; S. Tober; A. Westphal, eds.,Macroeconomic Problems of Transformation: Stabilization Policies and Economic Restructuring, Brookfield, VT: Edward Elgar, 1994.
Schaffer, M. E. "Do Firms in Transition Economies Have Soft Budget Constraint? A Reconsideration of Concepts and Evidence,"Journal of Comparative Economics, 26, 1998, pp. 80–103.
PlanEcon Report, 1990–98.
United Nations Economic Commission for Europe.Economic Survey of Europe in 1992–93, 1993.
Williamson, J. "Estimates of FEERs," in J. Williamson, ed.,The Exchange Rate System, Washington, DC: Institute for International Economics, 1994.
Winiecki J.; Kondratowicz, A., eds.The Macroeconomics of Transition: Developments in East Central Europe, New York, NY: Routledge, 1993.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Grubacic, S. Real exchange rate determination in eastern Europe. Atlantic Economic Journal 28, 346–363 (2000). https://doi.org/10.1007/BF02298326
Issue Date:
DOI: https://doi.org/10.1007/BF02298326