This paper examines transition dynamics in a search economy. We contrast two extreme cases: a completely unexpected reform and a fully anticipated reform. We show that announcing the reform in advance leads to stagnation in anticipation and output cycles after the implementation, that are more volatile than had a reform of identical magnitude been implemented immediately. However, the more volatile output trajectory of the anticipated case yields a higher PDV of output than an unanticipated reform of equal magnitude. This suggests that an anticipated reform is better than an unanticipated reform, even though the former induces greater volatility.
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Gomes, Joao F & Greenwood, Jeremy & Rebelo, Sérgio, 1997.
"Equilibrium Unemployment,"
CEPR Discussion Papers
1602, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted)
Other versions:
Joao Gomes & Jeremy Greenwood & Sergio Rebelo, 1997.
"Equilibrium Unemployment,"
NBER Working Papers
5922, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Joao Gomes & Jeremy Greenwood & Sergio T. Rebelo, 2001.
"Equilibrium Unemployment,"
RCER Working Papers
479, University of Rochester - Center for Economic Research (RCER).
[Downloadable!]