Policy Reforms, Currency Auctions, and Production Choices in Transition Economies

Abstract

Standard policy instruments such as currency devaluations and price reforms can lead to unusual responses in economies with underdeveloped financial markets and flexible price currency markets. We trace the effects of important policy instruments used within a dual exchange-rate regime, emphasizing that these effects depend on both the market power of producers in domestic industries and the concentration of power within thin currency auctions or interbank markets. The results are especially relevant for the transition economies of the former Soviet Union and Eastern Europe, where auction and interbank currency markets are being established and where some enterprises may exhibit significant local market power.