Exchange-rate adjustments in small market and centrally planned economies

In a centrally planned economy (CPE) that has eliminated detailed central planning of output and foreign trade and introduced some domestic price flexibility and organic linkages to world-market prices, the exchange rate can take on more than an accounting function. This paper contrasts the effects of exchange-rate adjustment in such a “modified” CPE (or MCPE) with those in a market economy. There are a number of reasons why MCPE authorities might eschew devaluation as a policy instrument, despite the possibility that it would be more effective in some cases in improving the trade balance than in a market economy.