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Exchange Rate Adjustment in Partially Liberalized Economy

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  • Grubacic, Sanja

Abstract

This paper develops a model of exchange rate determination in partially liberalized post-socialist economy that operates under soft budget constraints in nontradable sectors. The model captures the factors that determine the evolution of a country's external balance during the initial phase of economic liberalization. Three types of disturbances are the center of analysis: liberalization of trade and foreign exchange regime, devaluation, and price liberalization. We show that the real exchange rate appreciation may either improve or worsen the trade balance depending on the sources of this appreciation. Thus, we argue that the real exchange rate cannot reflect true country's competitiveness unless all sectors are equally exposed to hard budget constraints. The model implications are further analyzed through the empirical evidence on the relationship between the real exchange rate and trade balance in three selected East European countries. Copyright 2002 by Kluwer Academic Publishers

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  • Grubacic, Sanja, 2002. "Exchange Rate Adjustment in Partially Liberalized Economy," Economic Change and Restructuring, Springer, vol. 35(3), pages 253-270.
    • Handle: RePEc:kap:ecopln:v:35:y:2002:i:3:p:253-70
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    Cited by:

    1. Atif, Syed Muhammad & Sauytbekova, Moldir & Macdonald, James, 2012. "The determinants of australian exchange rate: a time series analysis," MPRA Paper 42309, University Library of Munich, Germany.

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