REAL EXCHANGE RATE DYNAMICS AND OUTPUT CONTRACTION UNDER TRANSITION
Bank of Greece and Panteion University
Two major stylized facts that emerged during the early transition experience of the economies of Central and Eastern Europe were the fall in output and the appreciation of the real exchange rate. In this paper, we attempt to give a theoretical explanation, beyond that found in the existing literature, for the emergence of these two facts, which relies on the role of two basic characteristics of these economies in the early stages of transition. The first refers to their structure involving the existence of an almost liberalized price system for domestic output, a large part of which, however, was still produced by state firms and the second to the nature of the disturbances they initially encountered.
Keywords: Transition economies, real exchange rate dynamics, output decline, structural reform, price liberalization.
JEL classification: F41
The author wishes to thank Heather Gibson for her insightful comments. The views expressed are those of the author and do not necessarily reflect the position of the Bank of Greece.
Economic Research Department,
Bank of Greece, 21, E. Venizelos Ave.,
102 50, Athens, Greece
Tel. +30210-3202381, Fax +30-210-3233025