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Will Gradualism Work When Shock Therapy Doesn't?

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  • Dehejia, Vivek

Abstract

When shock therapy is politically infeasible, will gradualism work? Mussa (1986) conjectured, in the context of a neoclassical model of adjustment, that the answer was ‘yes’. This paper takes up the Mussa conjecture by: (i) building a political-economy model in which it makes sense; (ii) stating the relevant political-economy constraint rigorously; and (iii) analysing the question in the context of Mussa’s model. It turns out that, in general, there is no a priori presumption that gradualism will work when shock therapy does not, because it has conflicting effects in a dynamic general equilibrium. The paper goes on to add further structure to the problem in the form of: (i) a simple parameterization of the policy choice; and (ii) a linearization of the model around a steady state. It is then possible to confirm the Mussa conjecture in a ‘local’ sense. Extensive numerical simulations of the non-linear model under a wide variety of parameter configurations confirm that the results are robust even for large reforms and even when the economy begins far away from its eventual steady state.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1552.

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Date of creation: Jan 1997
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Handle: RePEc:cpr:ceprdp:1552

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Keywords: Gradualism; Policy Reform; Shock Therapy; Structural Adjustment;

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Cited by:
  1. Artuç, Erhan & Chaudhuri, Shubham & McLaren, John, 2008. "Delay and dynamics in labor market adjustment: Simulation results," Journal of International Economics, Elsevier, vol. 75(1), pages 1-13, May.
  2. Digdowiseiso, Kumba, 2010. "The transition of China and Ussr: A political economy perspective," MPRA Paper 22561, University Library of Munich, Germany.
  3. Dehejia, Vivek H., 2001. "Optimal restructuring under a political constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 25(12), pages 1989-2006, December.
  4. Didier Laussel & Philippe Michel & Thierry Paul, 2004. "Intersectoral adjustment and unemployment in a two-country Ricardian model. Une approche par la méthode événementielle," Recherches économiques de Louvain, De Boeck Université, vol. 70(2), pages 169-192.
  5. Stephen Cameron & Shubham Chaudhuri & John McLaren, 2007. "Trade Shocks and Labor Adjustment: Theory," NBER Working Papers 13463, National Bureau of Economic Research, Inc.
  6. Laurila, Juhani & Singh, Rupinder, 2000. "Sequential reform strategy: The case of Azerbaijan," BOFIT Discussion Papers 8/2000, Bank of Finland, Institute for Economies in Transition.
  7. Shubham Chaudhuri & John McLaren, 2007. "Some Simple Analytics of Trade and Labor Mobility," NBER Working Papers 13464, National Bureau of Economic Research, Inc.
  8. Didier LAUSSEL & Philippe MICHEL & Thierry Paul, 2004. "Intersectoral adjustment and unemployment in a two-country Ricardian model," Discussion Papers (REL - Recherches Economiques de Louvain) 2004023, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  9. James Dean & Vivek H. Dehejia & Elinor Johansen & Sarah Turney, 2004. "Optimal Globalization and National Welfare," Carleton Economic Papers 04-17, Carleton University, Department of Economics.

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