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Transition and the Output Fall

  • Roland, Gérard
  • Verdier, Thierry

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1636.

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Date of creation: May 1997
Date of revision:
Handle: RePEc:cpr:ceprdp:1636
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