IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The Output Decline in Central and Eastern Europe: A Classical Explanation

Listed author(s):
  • Bofinger, Peter

The paper discusses the strong output decline in the countries of Central and Eastern Europe. It starts from the puzzling observation that the former CSFR, Hungary and Poland experienced a relatively similar decline in output in spite of completely different stabilization and transformation policies. Using an aggregate supply/demand (AS/AD) framework it can be shown that there are obvious `real' causes for an output drop. The command economy was characterized by a dual disequilibrium (labour market and goods market). The removal of the high excess employment leads to an inevitable drop of natural output and employment together with a reduction of real wages. This is amplified by a downward shift of the production function, mainly because of lack of corporate governance. With very flexible nominal wages, the transitional economy can be represented by the `classical' version of the AS/AD model, which suggests that the theoretical basis for demand-side explanations is rather weak. This supply-side view is compatible with the popular explanation given by Calvo and Coricelli, but their evidence for a `credit crunch' in Poland is not very strong. The paper also discusses the `Soviet trade shock' as a possible cause for the output drop. It shows that Hungary and Poland -- and to some extent the CSFR -- were able to compensate their loss of CMEA exports by expanding their exports to the West, so that an overall trade shock cannot be observed. The `classical' explanation of the output decline rules out policies stimulating demand. What is required is a framework enhancing the transfer of resources from state-owned enterprises to the emerging private sector.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 784.

in new window

Date of creation: May 1993
Handle: RePEc:cpr:ceprdp:784
Contact details of provider: Postal:
Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.

Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information: Email:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:784. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.