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Transition and the Output Fall

Author

Listed:
  • Roland, Gérard
  • Verdier, Thierry

Abstract

This paper presents a model that explains why in the transition economies of Central and Eastern Europe an important output fall has been associated with price liberalization. Its key ingredients are search frictions and Williamsonian relation-specific investment implying that new investments are made only after a new long-term partner has been found. When all firms search for new partners, output may fall because of three effects: a) disruption of previous production links; b) a fall in investment; and c) capital depreciation due to the absence of replacement investment. We show that forms of gradual liberalization like the Chinese ‘dual-track’ price liberalization may avoid or reduce the transitory output fall.

Suggested Citation

  • Roland, Gérard & Verdier, Thierry, 1997. "Transition and the Output Fall," CEPR Discussion Papers 1636, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1636
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    Keywords

    Asset Specificity; Output Fall; Search; Transition;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • P41 - Economic Systems - - Other Economic Systems - - - Planning, Coordination, and Reform
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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