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Output and Unemployment Dynamics in Transition

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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 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.

Suggested Citation

  • Vivek H. Dehejia & Douglas W. Dwyer, 2004. "Output and Unemployment Dynamics in Transition," Carleton Economic Papers 04-08, Carleton University, Department of Economics, revised Jun 2004.
    • Handle: RePEc:car:carecp:04-08
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    File URL: http://www1.carleton.ca/economics/research/working-papers/carleton-economic-papers-cep-2001-2010/
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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.
    2. Ichiro Iwasaki & Taku Suzuki, 2016. "Radicalism Versus Gradualism: An Analytical Survey Of The Transition Strategy Debate," Journal of Economic Surveys, Wiley Blackwell, vol. 30(4), pages 807-834, September.

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    Keywords

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    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • P1 - Political Economy and Comparative Economic Systems - - Capitalist Economies

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