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Transition and the output fall

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  • Gérard Roland
  • Thierry Verdier

Abstract

We present a model to explain why in the transition economies of Central andEastern Europe an important output fall has been associated with price liberalization. Its key ingredients are search frictions and Williamsonian relation‐specific investment, implying that new investments are made only after having found a new long‐term partner. When all firms search for new partners, output may fall because of three effects: a) disruption of previous production links, b) a fall in investment, and c) capital depreciation due to the absence of replacement investment. We show that forms of gradual liberalization like the Chinese ‘dual‐track’ price liberalization may avoid the transitory output fall. JEL classification: D21, D50, E30, E61, P41, P51.

Suggested Citation

  • Gérard Roland & Thierry Verdier, 1999. "Transition and the output fall," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 1-28, March.
    • Handle: RePEc:bla:etrans:v:7:y:1999:i:1:p:1-28
    DOI: 10.1111/1468-0351.00002
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • P41 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Planning, Coordination, and Reform
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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