how to create a currency? — the experience of slovenia

BERICHTE - - REPORTS

How to Create a Currency?- The Experience of Slovenia

By

Joze Meneinger

I. Introduction

O n June 26, 1991, Slovenia proclaimed independence. The proclamation coincided with unresolved disputes over custom duties. The Yugoslav federal authorities intervened by an

attempt to grab the control of the borders. The army was, however, badly surprised by the resistance. In a week, it gave up and an agree- ment was reached; the army withdraws, if Slovenia postpones the implementation of independence for three months. On October 8, 1991, Slovenia became "fully independent" and introduced its own currency - the Slovene Tolar (SIT). At the beginning of 1992, the country was recognized as an independent state by the EC member states. In May 1992, it became a member of the UN.

The above story ended tense and uncertain political and economic developments in the eighties and, definitely so, in 1990. The article thus begins by highlighting the debate that preceded the creation of the new monetary system, dealing with the conversion process, the proper starting exchange rate, and the dilemmas of fixed versus flexible exchange rate system. The paper then describes the creation of the system which was at odds with foreign financial experts' advises, and explains the developments which appeared to diverge from forecasts and from what is accepted in the literature.

Remark: The paper was prepared during the stay of the author with the International Center for Economic Research in Torino, Italy, that provided pleasant workable ambi- ence and financial support; both arc gratefully acknowledged. I thank Enrico Colom- batto for helpful comments on a previous draft.

Mencinger: The Experience of Slovenia 419

H. Uncertainties and Disputes

The economic policy of the Slovene government after the general elections in May 1990 was set by the premise that prospects of transition to a market economy within Yugoslavia are worsening; the economic policy of the federal government mistaken, the existing economic system unsuitable, and the Federation facing political turmoil [Mencinger, 1991]. Consequently, Slovene authorities focused on pragmatic adjustments to policy measures of the federal government, a gradual construction of a "normal" economic system, and acquisi- tions of policy tools. Such policy proved successful; in a year, Slovenia increased its relative competitiveness, established sovereignty in the fiscal and foreign exchange systems, and prepared institutional settings for a "'new" country.

The debates on monetary independence began in mid-1990 and concentrated on three issues: the consequences of unilateral decisions for the functioning of the financial system and for the relations with other countries and international institutions; possible arrangements of a monetary system in a confederation which, at that time, was considered an alternative; and prospects of monetary independence. After Serbian raid on the monetary system in December 1990, the discussions shifted to the name, the pattern, and the most appropriate moment for the introduction of the Slovene currency. 1

Establishing a monetary system involved a choice between a fixed and floating exchange rate. The former surrenders the control of money supply, the latter the control of the exchange rate; economic theory does not provide an answer which is preferable. The majority of experts, though, support the view that the fixed exchange rate system suits the countries in transition better [Meltzer, 1992], or pro- pose crawling peg as an alternative [Bomhoff, 1992]. Slovenia, con- trary to these beliefs, opted for floating after an abrupt drop of foreign exchange reserves in October 1990. The drop revealed the simple fact that the fixed rate could not be defended. The debates on the exchange rate system went on encompassing major theoretical quandaries known from the debates on the optimum currency area summarized by Ishijama [1975]. Two issues - the relationship between the real exchange rate and macroeconomic stability, and the anchoring role of

In the beginning of 1991, similar ideas appeared in other Yugoslav republics, notably Croatia which, at that time, favored a monetary union between Bosnia and Herce- govina, Croatia, and Slovenia. The ideas of establishing a Yugoslav currency board also circulated [See Hanke and Schuler, 1991].

420 Weltwirtschaftliches Arehiv

Table 1 - Slovene Economy in Independence - General Facts"

Area (in '000 km) 20.2 GDP at market prices 11,778 Population (in '000) 1,996 - exports b 5,826 Employment (in '000) 823 - imports b 5,269 Unemployment (in '000) 85 Total consumption 7,562 GPD/capita (in US $) 5,900 - private 6,019 External debt - general government 1,543 - long term (in '000 US$) 1,814 Gross domestic investments 2,992 - short term (in '000 US$) 141 - in fixed assets 2,238 - debt/export ratio 0.31 - change in inventories 754 - debt/GDP ratio 0.15

" Output and demand in 1990 in million ofUS$. - b Goods and non-factor services.

Source: Statisticni Letopis Slovenije, 1991.

the nominal exchange rate - divided the participants. The theoretical pros and cons were used to defend different positions, much less attention was addressed to arrangements in other countries [Aghevli et al., 1991].

The preparations on a functional level continue as well; before the end of 1990, for example, provisional notes were printed. At the same time, temporary solutions to handle the repercussions of a fixed and overvalued dinar and to cope with advancing hyperinflation were explored and introduced if found suitable. These efforts are well illus- trated by "The Law on the Introduction of a Parallel Currency" drafted on February 4, 1991, which proposed a parallel currency as a measure of account and an auxiliary means of payments. It envisaged a parallel monetary unit pegged to the Austrian schilling that would enter circulation through foreign transactions and float against the dinar. The idea was abandoned because a rent seeking "certificate of import privileges" offered a much simpler and less risky solution which did not expose Slovene banks to the likely angry reactions of the federal authorities. With the "certificate", Slovenia indirectly established an independent currency area within the Yugoslav fixed exchange rate system. It functioned in the following manner: an exporter who, for example, sold foreign exchange to a bank at the official exchange rate obtained a certificate that was saleable and would allow the bearer the access to foreign exchange. The fixed exchange rate plus the price of the certificate totaled the flexible rate. The black market for foreign exchange was also abolished by the silent legalization of the black market. Finally, "Slovene ECU", a measure of account to


which the parties in economic transactions could adhere, was introduced in May 1991, less than two months before the proclamation o f independence; its value was to be determined by the average weekly price of the "certificate" on the Ljubljana stock exchange.

The government document "P2" of April 15, 1991, handling the macroeconomic issues of independence, was the breaking point in the creation of the monetary system. It contemplated most of the settings which were later actually applied: a rapid conversion (3 to 5 days) of dinars to a new currency, a 1:1 conversion rate, and floating. 2 The opposite views were expressed in the documents that followed during the summer 1991. 3 They proposed dinars to be converted to a new currency at a 10:1 rate, and the currency to be pegged. The change in the views emanated in the so-called Sachs group which had, in the document "A Program for Economic Sovereignty and Restructuring of Slovenia" of March 21, 1991, proposed pegging the dinar to the deutsche mark, ECU or a basket, to assure a nominal anchor for a shock therapy stabilization program. 4

The debates on pegging versus floating reflect two opposite ap- proaches to the transition in Slovenia, in general: a radical, and a gradual approach. The former suggested a formal "'shock therapy" macroeconomic stabilization program encompassing a fixed exchange rate as an anchor, monetary policy which would support it, a balanced budget, a foreign financial assistance, and a restructuring of the man- ufacturing and of the banking sector administered by the government. The latter approach suggested that economic policy remains funded on a gradual construction of market institutions. There would be no formal stabilization program and government would play only an indirect role in restructuring the economy. A firm but flexible wage policy, a very restrictive government spending enhanced by a fiscal deficit if required, monetary policy enabling a tolerable liquidity, flexible exchange rate, reliance on foreign equity capital, and conces- sions for investments in infrastructure were the economic policy in- struments of this approach.

2 The possibility of future pegging would, according to the document, depend upon the existence of foreign exchange reserves and settlement of Yugoslav foreign domestic debt issues. 3 The author of the paper and of the document "P2" resigned from the post of deputy prime minister in May 1991. 4 The Sachs group changed its views in favor of unrestricted floating in a memorandum on October 8, 1991, when the floating exchange rate system was already introduced.

422 Weltwirtschaftliches Archiv

The linkage between the monetary and the exchange rate system was, in fact, defined by "The Law on the Foreign Exchange System" and by "The Law on the Bank of Slovenia" which instituted the independence of monetary authorities and supply of money as an exogenous variable determined by the central bank. The exchange rate would consequently be endogenous. Slovenia thus established a system of managed floating exercised mainly by developed market economies. The experiences that followed deafly confirmed that pegging would not be a reasonable alternative.

First, only a quasi monetary union would arise by fixing the new monetary unit to the monetary unit of a country with low inflation. It ensures financial discipline only if the exchange rate "never" changes which might turn out to be illusionary if the basic conditions for stability are not met. And indeed, they were not. The central bank had no foreign exchange reserves to defend the fixed rate.

Second, the monthly inflation rate in October 1991 was 21.5 percent. A moderate initial devaluation would therefore be immediately overridden by inflation, while a large devaluation would stimulate inflation and again endanger the fixed rate. By sticking to it, prices of non-tradables could only be adjusted to prices of tradables through an unrealistic fiscal contraction mechanism prolonging and deepening recession. Successive devaluations and/or restrictions on exchange rate transactions and imports would be the most likely outcome. The presumed advantage of the fixed exchange rate - enhancing confi- dence - would turn to a disadvantage of a crawling peg; Slovenia would have "the worst of both worlds" [Waiters, 1990, p. 15].

Third, what would be the nominal fixed rate assuring equilibrium real exchange rate: 27, 32, 42, 50 or 65 SIT per deutsche mark (DM)? The experiences of different "shock therapy" programs, including the program in former Yugoslavia, demonstrate that an "ex-ante" deter- mination of the equilibrium exchange rate is impossible. It would be even more futile to determine such an equilibrium in a "new" country; calculations based on past development would prove to be misleading as structural features of a "new" country differ from those in the past. The transition and, particularly, the disappearance of the traditional market in the former Yugoslavia have most strongly affected the volume of trade and trade patterns. Becoming a small country, Slove- nia should in a short period more than double the share of foreign trade in GDP. Pegging would, in such circumstances, hinder an adap- tation of the equilibrium real exchange rate to a newly required volume of trade and trade pattern.


HI. The Creation of the Monetary System

The Slovene monetary system was formally established on Octo- ber 8, 1991. The Bank of Slovenia (BS) assumed the functions of a central bank determined by law: the regulation of money supply, the issue of notes and coins, the prudential regulation and supervision of financial institutions, and the control of payments to the rest of the world. To separate and insulate the new monetary system from the rest of Yugoslavia, BS substituted The National Bank of Yugoslavia as the bankers' bank by assuming existing liabilities and claims, and transferring them to its own balance sheet. It also immediately adopted a series of measures to wipe out excess liquidity of the banks and to normalize reserve requirements. These measures included: a mutual cancelation of selective credits to commercial banks and their mandatory deposits, a reduction of minimum reserve requirements from 20% to 7%, a revocation of automatic availability of the rediscount facility, a fixation of the rediscount rate at 250 per annum, a reduction of rediscount quota, and a credit freeze from October 8 to October 31. While interest rates for new loan commitments were left free, BS requested that banks according to the given conversion table, linearly align interests on existing loans and deposits to the new rediscount rate for a period of 1 month. This was hoped to be a shock- type device for lowering inflationary expectations. It failed.

A new monetary unit, the Slovene tolar (SIT), was created by conversion of dinars to tolars at the 1 : 1 conversion rate. This was to mini- mize technical problems: all balances on the accounts were automat- ically converted; existing notes and coins were to be physically converted in three days in all banks and SDK (Social Accounting Service) offices. The conversion process was extremely smooth; few people came to a bank at all. Instead, they spent cash balances through routine purchases of goods and services. The uncertain future of the tolar deterred speculative inflows of dinars from other parts of Yugoslavia. Some controls on conversions were stipulated to prevent abuses; conversions up to 20,000 dinars (approximately twice the average monthly salary) were unconstrainted, the amounts between 20,000 and 100,000 dinars should be transferred to the owners' accounts, and the amounts exceeding 100,000 dinars could only be converted with major SDK offices. In fact, very few cases of conversion exceeding 20,000 dinars were reported.

The 1 : 1 conversion should also prevent a rounding up of prices which would most likely occur if other conversion rates were chosen.


More important, the 1 : 1 conversion was to cope with suspicions of population recalling previous conversions (after World War I, at the beginning and at the end of World War II), when many lost their financial wealth. The existing structure and a rather bad quality of notes already printed nearly one year earlier was also decisively in favor of the 1 : 1 conversion.S A small purchasing power of even the most valuable note should moderate the appetite of counterfeiting. The arguments that the rate of 10:1 would strengthen the faith of the population into a new monetary unit and lessen inflationary expectations were refused as irrelevant. So were "revolutionary" arguments that a proper currency reform includes different conversion rates depending on the owner, form and value of an asset converted.

Only 8.57 billion dinars were converted in cash, less than antici- pated by BS (up to 13 billions) and far less than the amount of cash which had entered circulation through the branch of the National Bank of Yugoslavia in Ljubljana (27 billions). The differences can be explained by a steady outflow of cash from Slovenia: by guest workers from other republics supporting their families at home; by tourists buying dinars on the borders and spending them on the Adriatic coast; and by the legalization of a black market in the spring of 1991 which brought foreign exchange from other republics.

The deutsche mark was a currency of reference, and 32 tolars for a mark the starting exchange rate for assets and liabilities in foreign currencies; Frankfurt cross exchange rates determined other rates. The tolar was to float on two separate markets; one for current account transactions and one for capital account transactions. Conse- quently, there would be two different market rates: the current account transactions exchange rate (CUREX), and the capital account transactions exchange rate (CAPEX). In fact, the delineation of the two markets went along the distinction between the market for the business sector the participants being companies, banks and BS; and the market for individuals, the participants being individuals, banks, and new private foreign exchange offices.

Exchange controls were few. There were no repatriation requirements and no restrictions regarding purposes for which foreign exchange might be bought by residents, both individuals and firms.

s The provisional notes-coupons were secretly printed during the last months of 1990 by the ministry of finance. Their value structure resembled the structure of dinars in circulation. They were nameless; the name was chosen by parliament among competitive alternatives (lipa, krona, ldas, karant, slovenski dinar) the very last night before conversion.


Foreign exchange accounts of the firms were abolished: firms which repatriated foreign exchange were free to dispose with it within two days, but should sell it to a commercial bank afterwards at a freely agreed-upon rate, except for 30 percent of foreign exchange which they had to surrender for the so-called "common needs" (servicing the external debt, payments for essential imports such as medical supplies, oil) at the "official" exchange rate. The requirement was abolished in December 1991.

The frozen foreign exchange deposits with the banks (the so-called old foreign currency accounts) were the main reason for a separate market for capital account transactions. BS would not intervene on this market and participating banks were obliged to equalize demand and supply each month; a restriction was abolished in April 1992. A few restrictions on the amount of tolars in cash that could be transferred to foreign countries were established in order to lessen the danger of counterfeiting.

The "official" exchange rate (OEX) was devised as a moving-par- ity rate obtained from CUREX by moving averages over a span of sixty days with descending daily weights. The speed of descendence would depend on the rate of inflation; the higher the inflation rate, the faster the descendence; with no inflation, all sixty days would have equal weight. The OEX has been used for settling customs duty payments, and was, until December 1991, also used for the surrender of 30 percent of foreign exchange for "common needs" and for the conversion of the "frozen" deposits in foreign exchange, held by individuals, to tolars.

IV. The "Miraculous" Strength of the Tolar

The initial nominal exchange rate of 32 SIT per deutsche mark was set rather arbitrary to match its real exchange rate to the real exchange rate of the dinar in April 1988, that is to the rate which had enabled partial convertibility and the growth of foreign exchange reserves during 1988 and 1989. The rate also implied a 16 percent real depreciation when compared to the rate in December 1989, when Marko- vic's "shock therapy" stabilization program was enacted, and a 15 percent real depreciation of the existing flexible rate of the "certificates". Nevertheless, the nominal exchange rate immediately rose up to about 42 SIT per deutsche mark on both markets, the main causes being expectations and high liquidity of the banks. BS did not possess


reserves to intervene, 6 while tightening liquidity of the banks was a matter of trial and error; behavioral relations in the "new" Slovene economy were simply unknown.

Three months of stability followed. In mid-January 1992, rumors of an "inevitable devaluation" combined with speculations related to the privatization of the apartments, pushed CAPEX to 52 SIT per deutsche mark. The CUREX followed. BS decided not to intervene, although it had already accumulated sufficient reserves. The tolar was already considered too strong, given the high inflation rates at the end of 1991. In February 1992, the rates stabilized again, at a level slightly over 50 SIT per deutsche mark. In mid-April, the CAPEX suddenly rose to 62 but the CUREX did not follow, and CAPEX dropped back to 52. BS used the opportunity to abandon the provision that banks should equalize demand and supply on the capital account market each month. The two markets colluded whereas forward market transactions remained banned.

In the observed period December 1991-June 1992, the average of CAPEX exceeded the average of CUREX by 3 percent, while the difference fluctuated between - 5 percent (in the first week of Decem- ber 1991) and + 18 percent (in mid-April 1992) and then gradually narrowed. Considerable short-run fluctuations characterized the movements of the exchange rate. A small size of the market, both in value terms (monthly foreign trade averaged $ 600 million) and in number of cases (300-400 current account transactions per day), appears to be the main cause. The abandonment of foreign exchange accounts for the firms, and the ban on forward market transactions have also served mainly to avert speculations that could become a source of major disruption in the small market.

Figure 1 presents the movements of the real exchange rate of the tolar around its "equilibrium real exchange rate" of October 8, 1991. It is calculated by dividing the ratios of the daily CUREX and the initial exchange rate, with the ratios of the daily retail sale price index and retail sale price index on October 8, 1991. The daily price indexes are linear interpolations of monthly price indexes reported on the 20th of the month.

After two sharp rises of the nominal rates, in October 1991 (from 32 to 42 SIT per deutsche mark) and in January 1992 (up to slightly above 52 SIT per deutsche mark), which pushed real rates above the

6 Upon the assumption of independence, foreign exchange reserves consisted of operating balances of commercial banks only, and amounted to $190 million.

Mcncinger: The Expericn~ of Slov~a 427

Figure I - The Real Exchange Rate of the Tolar (Dec, 1, 1991-June 30, 1992)

1.3

1.I"

1991 "~equilibrium" ~r rate I 0

0.9

i al/12 9a/1 9~/2 ae/a a~/~ g2/5 a2/B

initial real rate, the nominal rates remained substantially constant. As a consequence, given a constant rise in the price level, although at a decreasing rate, the real exchange rate fell by a third of its initial value until June; during the whole period, the tolar was "overvalued" on average by 18%. It was, however, accompanied by a surplus in foreign trade and constant growth of foreign exchange reserves which, on June 30, reached $ 825 million (SIT 66 billion), a high figure, given the size of the economy and the corresponding M1 (SIT 56 billion). The strength of the tolar, coupled with the gradual abolition of foreign exchange restrictions and the growth of foreign exchange reserves in the first six months, more and more appeared to be a "miracle" which repudiated forecasts of experts and contradicted theoretical findings. In fact, the "'miracle" can be rather easily explained: by the lags in responses to the real exchange rate changes, shifts in the conditions of supply and demand, and monetary policy.

Lags in responses to the changes in the real exchange rate offer an explanation for a trade surplus in the first half of 1992; considerable real depreciations in the period of "certificates" were augmented by the initial real depreciation of the tolar. This might have contributed to favorable trade flows in the first two quarters; a strong tolar would correspondingly bite in the third and fourth quarter.

Changes in the characteristics of demand and supply of foreign exchange appear most important. They shifted the equilibrium real


exchange rate downward by increasing supply, reducing demand or moving both. Some changes might be considered permanent, other temporary. Most derived from the secession of Slovenia and from the collapse of the rest of Yugoslavia. Some are related to the transition; the privatization of the apartments and, to a limited extent, the sales of a few enterprises to foreign owners, belong to this group. 7 The supply of foreign exchange increased also because producers tried to replace the sales to the former Yugoslav market (which in 1990, sur- passed the "proper" foreign market by 33 percent) with exports, and because people sold foreign exchange balances to moderate the drop in their standard of living. On the other hand, the demand for foreign exchange plummeted with the contraction in domestic demand and vanishing links with the rest of Yugoslavia, both reducing the imports of raw materials. Finally, the drop in real incomes also reduced sav- ings and the demand for foreign exchange, a traditional form of financial assets.

The shifts in demand and supply also indicate that the former highly protected Yugoslav market enabled an equilibrium real exchange rate which a small domestic market cannot assure. In particu- lar, the demand pattern on the domestic market differs substantially from Slovenia's supply pattern accommodated to the Yugoslav market. The sales to the former market can, consequently, only be re- placed by exports but at prices much lower than the prices at which the products were sold on the protected Yugoslav market. This, consequently, implies lower real wages both in the sector producing tradables, and in the sector producing non-tradables.

The role of monetary authorities cannot be overlooked. They were constantly urged to remove all restrictions and to "devalue". How- ever, BS reacted sensibly by removing foreign exchange restrictions only when appropriate conditions prevailed, and intervened only to prevent substantial market-driven nominal appreciations. Large scale monetization of foreign exchange could namely produce a monetary overhang and speed up inflation back to the hyper-inflationary levels [Bole, 1992]. Only in July and August 1992, when inflation fell to 2 and 1.4 percent per month, respectively, BS deliberately weakened the tolar by slowly pushing its nominal rate to 57 SIT per DM.

7 The privatization started in November 1991, with approximately 100,000 apartments to be privatized at very low prices; additional high discounts were extended to those who paid in cash. The privatization brought $ 200-300 million in foreign exchange, hitherto kept in foreign banks in neighboring countries or under mattresses.

Meneinger: The Experience of Slovenia 429

Table 2 - Monetary Aggregates in Slovenia (at the end of the period in million of SIT)

1. Absolute figures High-powered money (1) - notes in circulation (2) - banks' reserves (3) - banks' cash in vaults (3a) - banks' deposits (3b) - banks' obligatory reserves (3c) - non-banks' deposits (3d) Money (M1) (4) - currency in circulation (2) - demand deposits (5) Pass-book saving deposits (6) Foreign exchange deposits (7) Time and restricted deposits (8) Foreign currency reserves (US$)

(9) - banks' operating reserves (US$)

(10) - BS reserves (US$)

(11) Prices (Oct. 8, 199I)= 1 (12) Exchange rate (Oct. 8, 1991)=1 (13)

2. Ratios (4)/(1) (2)/(5) (6)/(4) (9)/(4)

(11)/(1) (3c)/(3) real exchange rate (13)/(12) real money supply (4),/[(12)/36,104]

Oct 91 1 Dec 91 March 92 ] May 92

18,489 15,925 16,854 23,930 8,117 9,152 10,199 14,926

10,372 6,773 6,655 9,004 476 617 668 1,200

2,472 595 838 4,004 7,411 5,494 5,095 3,669

13 67 54 131

36,104 38,912 44,153 52,131 8,117 9,152 10,587 16,474

27,987 29,760 33,566 35,657 6,812 15,952 14,649 19,136

47,751 54,375 77,787 83,774 18,587 21,898 43,344 52,740

237 401 548 703 11,139 23,138 45,046 58,701

221 282 341 423 10,387 16 ,271 28,030 35,321

16 119 207 280 752 6,867 17,016 23,380 1.06 1.53 2.11 2.36 1 . 2 0 1 . 3 2 1 . 6 4 1 . 6 6

1.95 2.44 2.62 2.18 0.29 0.31 0.32 0.46 0.19 0.41 0.33 0.37 0.31 0.59 1.02 1.13 0.04 0.43 1.01 0.98 0.71 0.81 0.76 0.41 1.13 0.86 0.78 0.70 1.00 0.75 0.61 0.65

Source: Bank of Slovenia.

A summary of monetary policy presented in Table 2 indicates that monetary policy was highly restrictive; real money supply decreased by 40% between October 1991 and June 1992. Foreign currency transactions became the only channel of money creation; the ratio of foreign exchange reserves of the BS and high-powered money increased from 0.04 to 0.98, and the ratio of total reserves and M1 from 0.31 to 1.13. The regulation of money supply and banks' liquidity shifted

430 Weltwirtschaftliehes Archiv

from the manipulation of required reserves to open market operations and prudential regulations; the share of required reserves in total banks' reserves decreased from 0.71 to 0.41. The money multiplier which rose between October 1991 and March 1992, was afterwards blocked by the increased ratio of currency to deposits.

The "miracle" cannot persist. The responses to real depreciations that prevailed in 1991 will eventually be followed by responses to real appreciations prevailing in 1992. The effects of the temporary shifts in supply and demand which preserved the mixture of the strong tolar and the growth of foreign exchange reserves, confronted with a mixture of inflation, plummeting production, and rising unemployment will also disappear. Unfortunately, even in Slovenia, miracles do not happen; monetary policy conceived to lower and keep inflation under control, and to preserve real exchange rate at the level which makes exports competitive, became trapped in conflicting goals. The only result of nominal depreciations, if not supported by measures to re- duce real wages and budget expenditures, would also in Slovenia be to push up inflation while doing nothing for competitiveness except in the very short run. When an exchange rate falls, import prices rise, domestic prices and wages follow. Only their sluggish adjustments could temporarily help the exporting sector. But, after many years of experiencing high inflation, money illusion is absent and adjustments are quick, preventing gains from depreciation to last. More lasting results require a reduction of the costs per unit of output, modest public expenditures, wage restraints, and administrative price controls of non-tradables provided by monopolies.

References

Aghevfi, Bijau B., Mohsin S. Khn, Peter J. Montiel, Exchange Rate Policy in Developing Countries: Some Analytical Issues. IMF Occasional Papers No. 78. Washington, D.C., 1991.

Bole, Veljko, "Inflacija in ekonomskopoliticne alternative (Inflation and Economic Policy Alternatives)". Gospodarska Gibanja, Vol. 226, 1992, pp. 25-41.

Bomhoff, Eduard J., "Monetary Reform in Eastern Europe". European Economic Re- view, Vol. 36, 1992, pp. 454-458.

Hanke, Steve H., Kurt Schuler, Monetary Reform and the Development of a Yugoslav Market Economy. Center for Research into Communist Economies, N.S. No. 3. London 1991.

International Monetary Fund (IMF), Exchange Arrangements and Exchange Restric- tions, Annual Report 1991. Washington, D.C., 1991.

Mencingcr: The Experience of Slovcnia 43 I

Ishijama, Yoshihide, "The Theory of Optimum Currency Areas. A Survey". IMF Staff Papers, Vol. 22, 1975, pp+ 344-383+

Meltzer, Allan H., "Prices and Wages in Transition to a Market Economy". In: S. Pejovich (Ed.), The 19 ~h Karl Brunner Symposium on Liberty, Analysis, and Ideology. Interlaken, Switzerland, 1992, pp. I - 13+

Meneinger, Joze, "From Socialism to Capitalism and from Dependence to Indepen- dence (Double Transition of Slovenia)". Est.Ovest, VoL 22, 1991, pp. 57-92.

Waiters, Alan, Sterling in Danger. The Economic Consequences of Pegged Exchange Rates. London 1990.

how to create a currency? — the experience of slovenia

Documents