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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

ABSTRACT

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.

Keywords: Transition dynamics, overshooting, competitiveness, output decline.

JEL classification: F41

The authors would like to thank George Tavlas and Sophocles Brissimis for helpful comments. The views expressed in this paper are those of the authors and should in no part be attributed to their respective institutions.

Correspondence:

Christos Papazoglou
Economic Research Department,
Bank of Greece, 21 E. Venizelos Av.,
102 50 Athens, Greece,
Tel. +30210-320.2381, Fax +30210-3233025
Email: cpapazoglou@bankofgreece.gr


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