The Exchange Rate, Prices and the Supply Response under Transition: A Simulation Study

Abstract

Across the transition economies, both extensive liberalization as well as persistent stabilization efforts have been vital for improving economic performance. Liberalization involves freeing prices, trade and exit from state controls whereas stabilization means reducing domestic and external imbalances. An important issue related to liberalization and stabilization processes refers to the policy adopted for the determination of the exchange rate; that is, the choice of an appropriate exchange rate regime that would better serve these processes. The determination of an appropriate exchange rate is directly related to the objectives of the transition process. In particular, it influences the liberalization process by exposing domestic markets to world prices and the stabilization process through its contribution to external and internal balance.