Real Exchange Rate Behaviour and Resource Allocation in the Visegrad Four

In this chapter we present a simple micro-macro-economic model to analyze the behavior of equilibrium real exchange rates in transitional economies. The model highlights that such real exchange rates will be driven by the sensitivity of resource allocation and the distribution of consumption to changes in relative prices, and on the nature of shocks to the equilibrium level of unemployment. For an economy experiencing a successful transition process, it is argued that the real exchange rate should be mean reverting. Evidence that the real exchange rates of Hungary and Poland have exhibited some mean reversion since the inception of the transition period is reported.