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Optimal restructuring under a political constraint

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  • Dehejia, Vivek H.

Abstract

One of the key issues in the new field of transition economics concerns the appropriate speed at which restructuring should take place. A related question concerns the appropriate speed at which policy reform should take place; this latter question is sometimes couched in terms of choice between "shock therapy" and "gradualism".In another paper (Dehejia, 1997), I examine the second question in the context of a neoclassical model of adjustmentand an explicit model of policy formation. In such a model, it is known that the first-best optimum is shock therapy.The chief finding of that paper is that, when the (preferred) shock therapy reform is politically infeasible, it is possible to construct a gradualist alternative. The goal there being to demonstrate the existence of a gradualist alternativewhen shock therapy is unvaliable. the paper does not consider what is in some ways a logically prior question: if shock therapy is infeasible, what is the second-best optimum reform policy? This in turn will determine the optimal speed of restructuring. This latter question is the one addressed in the present paper.
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Suggested Citation

  • Dehejia, Vivek H., 2001. "Optimal restructuring under a political constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 25(12), pages 1989-2006, December.
    • Handle: RePEc:eee:dyncon:v:25:y:2001:i:12:p:1989-2006
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    References listed on IDEAS

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    1. Mussa, Michael, 1978. "Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 775-791, October.
    2. Vivek H. Dehejia, 2003. "Will Gradualism Work When Shock Therapy Doesn"t?," Economics and Politics, Wiley Blackwell, vol. 15(1), pages 33-59, March.
    3. Vivek H. Dehejia, 1996. "Shock Therapy vs. Gradualism: A Neoclassical Perspective," Eastern Economic Journal, Eastern Economic Association, vol. 22(4), pages 425-431, Fall.
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    Cited by:

    1. Vivek Dehejia & Douglas Dwyer, 2004. "Output and unemployment dynamics in transition," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 7(2), pages 69-81.

    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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