Edited by Thomas Oatley and W. Kindred Winecoff
Chapter 11: Exchange rates in transition economies
Over the last 20 years, the transformation of centrally planned economies has held great attraction for both economists and political scientists. The exchange rate and monetary strategies are particularly interesting due to their role in economic development in the post-communist region. Under the command economy, the exchange rate served as an accounting unit for statistical purposes, but it had a very limited impact on actual trade flows (Radzyner and Riesinger 1996, 20). After the collapse of the Soviet-type socialist system, market institutions were virtually non-existent, and market mechanisms were weak or absent. In this context, the exchange rate has served as the most important asset price. The choice of exchange rate regime, between fixed and floating exchange rates, has been a key macroeconomic policy decision in post-communist countries, albeit a highly contested one (Pomfret 2003, 600). The question of exchange rate regime choice in Eastern Europe (EE) is intriguing because in spite of the (arguably) similar starting point, transition countries adopted rather diverse exchange rate regimes, ranging from free floats to currency boards, and they experienced several regime shifts. These shifts were the result of proactive policy management as well as forced changes related to financial crises. Sharply different regimes continue to coexist, so exchange rate regimes in the transition region exhibit a degree of heterogeneity both across countries and over time.
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