A Method for Indicating Economic Transition with an Application to Albania

We offer a method for assessing the progress of transition economies towards becoming market economies. A simple macroeconomic model is used which incorporates certain microeconomic features relevant to a transition economy that is introducing market-driven resource allocation. According to our model, mean reversion in the real exchange rate suggests that early economic reforms from 1992 to 1996 in Albania were promoting economic transition. Our findings for this period are supportive of the analysis of others including the IMF.