Reform Reversals and Output Growth in Transition Economies
AbstractThis paper tests whether there is a macroeconomic cost of a reform reversal during transition. A reform reversal is defined as a downgrading in the level of an average reform indicator. In the standard empirical framework the current level of reform affects growth negatively, while the lagged level affects growth positively. This non-linear effect is shown to imply a counterintuitive, short-lived positive effect of a reversal. From a theoretical point of view however, most models assume a reversal to be costly. The existence of reversal costs is even crucial for gradualist strategies to dominate big bang strategies in the presence of aggregate uncertainty. In a simultaneous equation system with growth and the level of reform as dependent variables we explicitly introduce a reversal parameter. Empirical results suggest that a reversal generates an immediate negative contribution to real output growth. Taking into account the level of reform a country achieved, a reversal is found to be more costly at higher levels of the reform indicator.
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Bibliographic InfoPaper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 03/183.
Length: 42 pages
Date of creation: Jun 2003
Date of revision:
transition; structural reform; reversal; stabilization; initial conditions;
Other versions of this item:
- Bruno Merlevede, 2003. "Reform reversals and output growth in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(4), pages 649-669, December.
- Merlevede Bruno, 2003. "Reform reversals and output growth in transition economies," Working Papers 2003013, University of Antwerp, Faculty of Applied Economics.
- O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
- P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform
- P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
- P27 - Economic Systems - - Socialist Systems and Transition Economies - - - Performance and Prospects
This paper has been announced in the following NEP Reports:
- NEP-TRA-2003-07-21 (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.:
- Ratna Sahay & Jeromin Zettelmeyer & Eduardo Borensztein & Andrew Berg, 1999. "The Evolution of Output in Transition Economies - Explaining the Differences," IMF Working Papers 99/73, International Monetary Fund.
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