Abstract

After a long downturn, the economies of transition countries have bounced back with strong output growth and stable fiscal and monetary policies. The group ranges from large countries like Russia, with extensive resources to much smaller countries in Central and Eastern Europe. The change of their planned economic systems to market economies can be regarded, as one of the biggest socioeconomic transformations in the human history. This dissertation studies the dynamic transition process equipped with sophisticated econometric techniques to improve on the current empirical literature. In the first part I employ the structural VAR model of Clarida and Gali (1998) to a sample of transition countries in order to assess the importance of different types of externalities. In particular, I am interested in how much of the variances of output, real effective exchange rate and prices are explained by the three types of shocks before the Euro adoption. In the second part I use a regime switching autoregressive model to determine, whether CEE countries have put emphasis on stabilizing inflation or on output during the last decade of transition. I find that the monetary policy depended on the country specific structure and therefore monetary policy in transition countries before joining the euro had focused more on the output stabilization. This is of particular relevance for their prospective participation in a monetary union, where in contrast, the main focus will be on the union-level price stability. Finally, we estimate error correction model determining the long-run exchange rate elasticity in Russia and summarize my main theoretical and empirical findings.