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Output and Unemployment Dynamics in Transition

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    Abstract

    This paper examines transition dynamics in a search economy. We contrast two extreme cases: a completely unexpected reform and a fully anticipated reform. We view the former as a metaphor for a reform being announced and implemented with immediate effect, the latter as a metaphor for a reform being announced in advance of its implementation. In contrast to models with convex adjustment costs, we show that announcing the reform in advance leads to stagnation in anticipation of the reform 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 nonetheless yields a higher PDV of output than an unanticipated reform of equal magnitude. This suggests, therefore, that an anticipated reform is better than an unanticipated reform, even though the former induces greater volatility.

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    File URL: http://www1.carleton.ca/economics/research/working-papers/carleton-economic-papers-cep-2001-2010/
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    Bibliographic Info

    Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 04-08.

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    Length: 34 pages
    Date of creation: May 2004
    Date of revision: Jun 2004
    Publication status: Published: Revised version in Journal of Policy Reform, Vol. 7, No. 2 (June 2004), pp. 69–81
    Handle: RePEc:car:carecp:04-08

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    Related research

    Keywords: adjustment costs; industy restructuring; transition dynamics; policy reform;

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