1. External Economic Relations Division, Czech National Bank, Na P?íkopě 28, 115 03 Praha 1, Czech Republic;2. International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, United States
Abstract:
In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run path of a transition economy. The model's novel feature is the inclusion of quality investment in the standard framework of applied general equilibrium two-country models. This feature is necessary to explain the trend in the real exchange rate. We present an application to the Czech economy.