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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. Robert G. King & Sergio T. Rebelo, 1989. "Transitional Dynamics and Economic Growth in the Neoclassical Model," NBER Working Papers 3185, 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. Andrew Atkeson & Patrick Kehoe, 1997. "Industry Evolution and Transition: A Neoclassical Benchmark," NBER Working Papers 6005, National Bureau of Economic Research, Inc.
  4. Dehejia, Vivek & Dwyer, Douglas W, 2000. "Output And Unemployment Dynamics In Transition," CEPR Discussion Papers 2450, C.E.P.R. Discussion Papers.
  5. Gomes, Joao & Greenwood, Jeremy & Rebelo, Sergio, 2001. "Equilibrium unemployment," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 109-152, August.
  6. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
  7. 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.
  8. Mariano Tommasi, 1995. "Where are we in the Political Economy of Reform?," UCLA Economics Working Papers 733, UCLA Department of Economics.
  9. Micael Castanheira De Moura & Gérard Roland, 2000. "The optimal speed of transition: a general equilibrium analysis," ULB Institutional Repository 2013/10011, ULB -- Universite Libre de Bruxelles.
  10. 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.
  11. Vivek H. Dehejia, 1997. "Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach," William Davidson Institute Working Papers Series 35, William Davidson Institute at the University of Michigan.
  12. Olivier Blanchard & Michael Kremer, 1997. "Disorganization," William Davidson Institute Working Papers Series 38, William Davidson Institute at the University of Michigan.
  13. Andrew Atkeson & Patrick J. Kehoe, 1995. "Social insurance and transition," Working Papers 547, Federal Reserve Bank of Minneapolis.
  14. 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.
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