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Output and Unemployment Dynamics in Transition

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 had a reform of identical magnitude been implemented immediately. However, the more volatile output trajectory of the anticipated case nonetheless yields a higher PDV of output than an unanticipated reform of equal magnitude. This suggests, therefore, that an anticipated reform is better than an unanticipated reform, even though the former induces greater volatility.

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File URL: http://www1.carleton.ca/economics/research/working-papers/carleton-economic-papers-cep-2001-2010/
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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 04-08.

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Length: 34 pages
Date of creation: May 2004
Date of revision: Jun 2004
Publication status: Published: Revised version in Journal of Policy Reform, Vol. 7, No. 2 (June 2004), pp. 69–81
Handle: RePEc:car:carecp:04-08
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  1. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. King, Robert G & Rebelo, Sergio T, 1993. "Transitional Dynamics and Economic Growth in the Neoclassical Model," American Economic Review, American Economic Association, vol. 83(4), pages 908-31, September.
  5. Castanheira, Micael & Roland, Gérard, 1996. "The Optimal Speed of Transition: A General Equilibrium Analysis," CEPR Discussion Papers 1442, C.E.P.R. Discussion Papers.
  6. Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1997. "Replacement Echoes in the Vintage Capital Growth Model," Journal of Economic Theory, Elsevier, vol. 74(2), pages 333-348, June.
  7. Andrew Atkeson & Patrick J. Kehoe, 1993. "Social Insurance and Transition," NBER Working Papers 4411, National Bureau of Economic Research, Inc.
  8. Mariano Tommasi, 1995. "Where are we in the Political Economy of Reform?," UCLA Economics Working Papers 733, UCLA Department of Economics.
  9. 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.
  10. Blanchard, Olivier & Kremer, Michael, 1997. "Disorganization," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1091-1126, November.
  11. Joao Gomes & Jeremy Greenwood & Sergio Rebelo, 1997. "Equilibrium Unemployment," NBER Working Papers 5922, National Bureau of Economic Research, Inc.
  12. 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.
  13. Dehejia, Vivek, 1997. "Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach," CEPR Discussion Papers 1619, C.E.P.R. Discussion Papers.
  14. Andrew Atkeson & Patrick Kehoe, 1997. "Industry Evolution and Transition: A Neoclassical Benchmark," NBER Working Papers 6005, National Bureau of Economic Research, Inc.
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