Exchange Rate Policy and Real Exchange Rate Changes in Economic Transition

Exchange rate policies in post-communist economies

“…The idea that the shift from central planning to a market system should bring about substantial efficiency gains has been suggested by many authors (see, e.g. Oblath, 1994;Portes, 1994;Rosati, 1994;Hrncir, 1994;Halpern and Wyplosz, 1995). According to one recent study, with the same capital and land per worker, the transition countries would achieve an output per worker 42-52 per cent higher than under central planning (Bergson, 1994).…”

“…> 1, which would imply that k a >1. Because k is smaller than one, while the value of the coefficient a may be greater than one, it is impossible to establish a priori a fixed relationship between 1 and d. Moreover, it is not necessary to decide a priori whether devaluation should be real (as postulated by Oblath, 1994), or only nominal (Berg and Sachs, 1992), although in most cases reaching the "threshold" level would probably mean some degree of real depreciation ex post. It follows that there are values of corrective inflation for which a real devaluation is necessary, although much more likely are the situations when k a < 1, i.e.…”

“…[I] According to Oblath (1994), the extent of initial devaluation should be larger in the case low degree of "openness" of the economy. However, stronger autarchy does not have to be necessarily associated with a more distorted exchange rate (compare Bulgaria and the Czech Republic).…”

Exchange rate policies during transition from plan to market

“…Similarly, the higher is the intensity of monetary imbalance, the larger is the necessary devaluation. According to Oblath (1994), the extent of initial devaluation should be larger in the case of a low degree of "openness" of the economy. However, stronger autarchy does not necessarily have to be associated with a more distorted exchange rate (compare Bulgaria and the Czech Republic).…”

“…It can be shown that under some simplifying assumptions, the extent of the initial devaluation depends only on the black market premium, which reflects the expected corrective inflation, and the proportion of total demand for foreign exchange satisfied at the black market rate (see Appendix). Moreover, it is not necessary to decide u priori whether devaluation should be real (as postulated by Oblath, 1994), or only nominal (Berg and Sachs, 1992), although in most cases reaching the "threshold" level would probably mean some degree of real depreciation ex post.…”