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Output And Unemployment Dynamics In Transition

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  • Dehejia, Vivek
  • Dwyer, Douglas W

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 if a reform of identical magnitude had been implemented immediately. This provides, therefore, an argument in favour of immediately implementing a reform as against announcing it in advance with a delayed implementation. One could interpret this is an argument in favour of 'shock therapy' as against 'gradualism', where the latter has the specific connotation of delaying reform (rather than sequencing it slowly).

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2450.

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Date of creation: May 2000
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Handle: RePEc:cpr:ceprdp:2450

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Related research

Keywords: Adjustment Costs; Industry Restructuring; Policy Reform; Transition Dynamics;

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References

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  1. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
  2. Blanchard, Olivier & Kremer, Michael, 1997. "Disorganization," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1091-1126, November.
  3. King, R.G. & Rebelo, S.T., 1989. "Transitional Dynamics And Economic Growth In The Neoclassical Model," RCER Working Papers 206, University of Rochester - Center for Economic Research (RCER).
  4. Philippe Aghion & Olivier J. Blanchard, 1994. "On the Speed of Transition in Central Europe," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 283-330 National Bureau of Economic Research, Inc.
  5. Gomes, Joao F & Greenwood, Jeremy & Rebelo, Sérgio, 1997. "Equilibrium Unemployment," CEPR Discussion Papers 1602, C.E.P.R. Discussion Papers.
  6. Castanheira, Micael & Roland, Gerard, 2000. "The Optimal Speed of Transition: A General Equilibrium Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 219-39, February.
  7. Atkeson, Andrew & Kehoe, Patrick J, 1996. "Social Insurance and Transition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 377-401, May.
  8. Raouf Boucekkine & Marc Germain & Omar Licandro, . "Replacement echoes in the vintage capital growth model," Working Papers 96-16, FEDEA.
  9. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
  10. Mariano Tommasi, 1995. "Where are we in the Political Economy of Reform?," UCLA Economics Working Papers 733, UCLA Department of Economics.
  11. Raouf Boucekkine & Omar Licandro & Christopher Paul, . "Differential-Difference Equations in Economics: On the Numerical Solution of Vintage Capital Growth Models," Computing in Economics and Finance 1996 _036, Society for Computational Economics.
  12. Andrew Atkeson & Patrick Kehoe, 1997. "Industry Evolution and Transition: A Neoclassical Benchmark," NBER Working Papers 6005, National Bureau of Economic Research, Inc.
  13. Vivek H. Dehejia & Douglas W. Dwyer, 1998. "Output and Unemployment Dynamics in Transition," William Davidson Institute Working Papers Series 178, William Davidson Institute at the University of Michigan.
  14. Vivek H. Dehejia, 1997. "Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach," William Davidson Institute Working Papers Series 35, William Davidson Institute at the University of Michigan.
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Cited by:
  1. Dehejia, Vivek & Dwyer, Douglas W, 2000. "Output And Unemployment Dynamics In Transition," CEPR Discussion Papers 2450, C.E.P.R. Discussion Papers.

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