Chapter 6 distinguishes between the benefits of an open economy and the specific risks of opening the economy. A first challenge to transition policy is how to mitigate the shocks on production stemming from getting distorted price relations right after the removal of trade controls and selective protection. The chapter explains why, and how, output declines when opening leads to a massive adjustment of price relations via a higher price level as well as via changing the positive into the negative value added of industries. The chapter further discusses whether, and how, to use the exchange rate of the currency as a non-selective tool for protecting the economy. The chapter also illustrates that the exchange rate tool becomes more or less ineffective when the government lifts capital controls. The exchange rate depends on free capital flows, and undesired capital movements have their own impact on output via the exchange rate and the financial system.
- Exchange Rate
- Real Exchange Rate
- Price Elasticity
- Capital Inflow
- Transition Country
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References and further reading
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Gabrisch, H. (1995) ‘Ostdeutschland und Mittel- und Osteuropa — ein vergleich der gesamtwirtschaftlichen Entwicklung’, in R. Pohl (ed.), Herausforderung Ostdeutschland: Fünf Jahre Währungs-, Wirtschafts- und Sozialunion (Berlin: Analytica), 185–201.
Gácz, J. (1994) ‘Trade policy in the Czech and Slovak Republics, Hungary and Poland in 1989–1993: a comparison’, CASE Studies and Analyses No. 11.
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McKinnon, R. I., The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy (Baltimore: The John Hopkins Press, 1991), Chapter 12.
Mills, T. C. and E. J. Pentecost (2000) ‘The real exchange rate and the output response in four EU accession countries: business cycle volatility and economic growth’, Research Paper 00–04, Loughborough University, Department of Economics; available at http://www.lboro.ac.uk/departments/ec/Reasearchpapers/BCV/bcv00–5/bcv00–5.pdf.
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Richards, A. J. and G. H. R. Tersman (1996) ‘Growth, nontradables, and price convergence in the Baltics’, Journal of Comparative Economics, 23(2), 121–46.
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UN-ECE (1998, 2003, 2004) Economic Survey of Europe (New York and Geneva: United Nation Economic Commission for Europe).
© 2006 Hubert Gabrisch and Jens Hölscher
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Gabrisch, H., Hölscher, J. (2006). Opening towards the World. In: The Successes and Failures of Economic Transition. Palgrave Macmillan, London. https://doi.org/10.1057/9780230626584_7
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-51752-7
Online ISBN: 978-0-230-62658-4