On Aghion's and Blanchard's "On the Speed of Transition in Central Europe"
AbstractIn this paper we derive the correct solution of optimal closure of the state sector studied in Section 6.4 of Aghion and Blanchard (1994). Aghion and Blanchard only present an 'approximate' solution which entails a constant unemployment rate in what they call a turnpike approximation. We show that optimal unemployment paths have two features. First, unemployment is increasing up to a certain point in time, when, second, the remaining inefficient state sector is closed down. At that point in time, which we may define as the end of transition, unemployment is discontinuous. The approximate solution presented by Aghion and Blanchard is thus found to lead to welfare losses compared to the optimal policy. In particular, the unemployment rate corresponding to the solution presented in Aghion and Blanchard is too low. Our solution is formally based on transforming the dynamic optimization problem to a scrap value problem with free terminal time.
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Bibliographic InfoPaper provided by Institute for Advanced Studies in its series Economics Series with number 175.
Length: 9 pages
Date of creation: Sep 2005
Date of revision:
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Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-MAC-2005-10-04 (Macroeconomics)
- NEP-TRA-2005-10-04 (Transition Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Aghion, P. & Blanchard, O.J., 1993.
"On the Speed of Transition in Central Europe,"
93-8, Massachusetts Institute of Technology (MIT), Department of Economics.
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