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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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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. Castanheira, Micael & Roland, Gérard, 1996. "The Optimal Speed of Transition: A General Equilibrium Analysis," CEPR Discussion Papers 1442, C.E.P.R. Discussion Papers.
  2. Aghion, P. & Blanchard, O.J., 1993. "On the Speed of Transition in Central Europe," Working papers 93-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. 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.
  4. 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.
  5. Blanchard, Olivier & Kremer, Michael R., 1997. "Disorganization," Scholarly Articles 3659691, Harvard University Department of Economics.
  6. 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.
  7. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
  8. Joao Gomes & Jeremy Greenwood & Sergio T. Rebelo, 2001. "Equilibrium Unemployment," RCER Working Papers 479, University of Rochester - Center for Economic Research (RCER).
  9. Andrew Atkeson & Patrick J. Kehoe, 1995. "Social insurance and transition," Working Papers 547, Federal Reserve Bank of Minneapolis.
  10. Tommasi, Mariano & Velasco, Andres, 1995. "Where are we in the Political Economy of Reform?," Working Papers 95-20, C.V. Starr Center for Applied Economics, New York University.
  11. Boucekkine, Raouf & Licandro, Omar & Paul, Christopher, 1997. "Differential-difference equations in economics: On the numerical solution of vintage capital growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 347-362.
  12. 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.
  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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